THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


ACQ 


I  264 


GALLOWAY  &  PORTER, 

hipw  A  apr.ONn.MANi  HnrnefKFi  t  fha. 


THE   CITIZEN'S   LIBRARY 

OF 

ECONOMICS,    POLITICS,   AND 
SOCIOLOGY 

EDITED   BY 
RICHARD  T.   ELY,   Ph.D.,  LL.D. 

DIRECTOR  OF  THE  SCHOOL  OF  ECONOMICS, 

POLITICAL  SCIENCE,   AND   HISTORY, 

UNIVERSITY  OF  WISCONSIN 


ECONOMIC    CRISES 


•The 


^ 


THE     CITIZEN'S    LIBRARY 


ECONOMIC     CRISES 


BY 


EDWARD   D.  JONES,  Ph.D. 

ASSISTANT   PROFESSOR   OF   ECONOMICS  AND   COMMERCIAL 
GEOGRAPHY,   UNIVERSITY  OF  WISCONSIN 


THE   MACMILLAN   COMPANY 

LONDON :  MACMILLAN  AND  CO.,  Ltd. 
1900 

All  rights  reserved 


Copyright,  1900, 
Bif  THE  MACMILLAN  COMPANY. 


NortaoolJ  ^reau 

J.  8.  CuBhlng  &  Co.  —  Berwick  &  SmUh 
Norwood  Masa.  U.S.A. 


UNIVERSITY  OF  SOUTHERN  CALIFORNIA  UBRAfflC 


.Jfc37 


e. 


CONTENTS 


I.  Introduction 

II  The  Industrial  Equilibrium 

III.  The  Organization  of  Industry    . 

IV.  Crises  and  the  Problem  of  Capital 
V' .  Crises  and  the  Wage  System 

VI.  Crises  and  Legislation 

VII.  The  Periodicity  of  Crises 

VIII.  Credit  and  Speculation 

IX.  The  Psychology  of  Crises 

X.  Conclusion 


Bibliography 
Index  . 


PAGE 
I 

21 
41 

58 

81 

103 

180 

2ig 
2215 
247 


'"'2S7im 


ECONOMIC    CRISES 

CHAPTER   I 

INTRODUCTION 

The  growth  and  differenriation  of  industrial 
institutions  which  have  taken  place  within  the 
present  century  have  brought  many  new  and  per- 
plexing problems  to  the  man  of  affairs  and  the 
student  of  economics.  None  of  these  problems 
takes  a  firmer  hold  upon  the  fundamentals  of 
economic  society  than  does  that  of  crises,  and 
few  of  them  receive  more  attention  or  create 
more  controversy. 

The  crisis  is  practically  of  nineteenth-century 
origin,  and  it  is  an  acute  malady  to  which  business 
appears  to  be  increasingly  subject.  These  crises 
are  periodically  recurring  convulsions  which  para- 
lyze the  course  of  trade,  give  rise  to  violent  fluctu- 
ations of  values,  and  leave  behind  them  crippled 
industries,  bankrupt  or  suspicious  capitalists,  and 
impoverished  laborers  as  the  result  of  their  visits. 

It  is  often  desirable  to  begin  a  treatise  with  a 
definition.     Descriptions  and  definitions,  however, 

B  I 


ECONOMIC   CRISES 

shade  off  almost  imperceptibly  into  one  another, 
and  what  may  be  called  a  descriptive  definition  is 
sometimes  best  suited  to  the  purpose.  Two  such 
descriptions  of  an  industrial  cycle  containing  a 
crisis  are  here  offered.  The  first,  taken  from  the 
Tracts  of  Lord  Overstone,  is  as  follows :  "  State 
of  quiescence,  improvement,  growing  confidence, 
prosperity,  excitement,  overtrading,  convulsions, 
pressure,  stagnation,  distress,  ending  again  in  qui- 
escence."^ A  somewhat  more  extended  descrip- 
tion from  the  pen  of  Frederick  Engels  is  as  follows : 
"  The  whole  industrial  and  commercial  world,  pro- 
duction and  exchange,  among  all  civilized  peoples 
and  their  more  or  less  barbaric  hangers-on,  are 
thrown  out  of  joint  about  once  every  ten  years. 

1  The  symptoms  of  a  crisis  are  thus  catalogued  by  Max  Wirth : 
"  I,  Abnormal  activity  in  floating  enterprises,  and  boldness  in  spec- 
ulation. 2.  Unusual  activity  in  stock-jobbing :  viz.  the  desire  to 
found  stock  corporations  in  order  to  use  all  possible  means  to  force 
the  stocks  rapidly  to  a  high  figure,  and  then  sell  out  at  a  profit,  leav- 
ing the  corporation  to  those  in  whose  hands  the  stock,  like  an  un- 
lucky card,  is  found  at  last.  A  rule  in  such  cases  is  that  a  good 
business  is  operated  by  one's  self  or  a  few  companions,  but  a  bad 
one  is  formed  into  a  stock  company.  3.  Unusual  excitement  and 
gullibility  of  the  public  caused  by  the  report  of  large  profits. 
4.  Rapid  increase  of  luxury.  5.  Sharp  rise  of  the  price  of  necessa- 
ries, articles  of  luxury,  raw  materials,  and  provisions.  6.  Rise  in 
the  price  of  real  estate.  7.  Strong  demand  for  labor,  and  rise  in 
wages.  8.  Unusual  expansion  of  credit  and  credit  instrumentalities 
in  consequence  of  which  a  rapid  and  unusual  increase  in  discount. 
9.  Large  demand  for  cash,  and,  in  consequence  of  this  demand,  a 
decline  in  stocks."  —  "  Handbuch  des  Bankwesens,"  3  Aufl.,  p.  62. 
The  same  is  also  contained  in  the  "  Geschichte  der  Handelskrisen," 
by  Max  Wirth. 

2 


INTRODUCTION 

Commerce  is  at  a  standstill,  the  markets  are  glutted, 
products  accumulate,  as  multitudinous  as  they  are 
unsalable,  hard  cash  disappears,  credit  vanishes, 
factories  are  closed,  the  mass  of  the  workmen  are 
in  want  of  the  means  of  subsistence,  because  they 
have  produced  too  much  of  the  means  of  subsist- 
ence, bankruptcy  follows  upon  bankruptcy,  execu- 
tion upon  execution.  The  stagnation  lasts  for 
years ;  productive  forces  and  products  are  wasted 
and  destroyed  wholesale,  until  the  accumulated 
mass  of  commodities  finally  filters  off,  more  or  less 
depreciated  in  value,  until  production  and  exchange 
gradually  begin  to  move  again.  Little  by  little  the 
pace  quickens.  It  becomes  a  trot.  The  industrial 
trot  breaks  into  a  canter,  the  canter  in  turn  grows 
into  the  headlong  gallop  of  a  perfect  steeple-chase 
of  industry,  commercial  credit,  and  speculation, 
which  finally,  after  breakneck  leaps,  ends  where  it 
began  —  in  the  ditch  of  a  crisis.  And  so  over  and 
over  again."  2 

If  we  confine  our  thought  to  the  culminating 
period  of  a  crisis,  we  may  define  it  more  concisely 
than  is  done  above,  in  the  following  terms  :  A  crisis 
is  the  sudden  application  of  a  critical  conservatism 

^  "  Socialism :  Utopian  and  Scientific  "  (trans,  by  Edward  Ave- 
ling),  London,  1892,  pp.  64,  65.  The  steps  are  given  by  another 
author  thus :  "  A  round  of  variations  expressed  as  follows,  is  pretty 
sure  to  run  its  course  at  least  once  in  the  life  of  each  generation : 
'torpor,  prudence,  health,  plethora,  blood-letting';  or  thus:  'stag- 
nation, economy,  productive  industry,  accumulation,  enterprise,  ex- 
pansion, collapse.'  "  —  T.  F.  Plunkett,  "  Money  Panics  and  Specie 
Payments,"  Pittsfield,  Mass.,  1873,  p.  9. 

3 


ECONOMIC   CRISES 

to  business  transactions,  leading  to  such  a  demand 
for  liquidation  as  to  cause  a  widespread  inability 
among  business  men  to  meet  their  obligations.^ 

Herkner  follows  Roscher  in  defining  crises  as 
consisting  of  a  disturbance  in  the  equilibrium 
between  production  and  effective  demand.'* 

In  the  work  of  definition  the  most  important 
point  is  to  establish  the  proper  distinction  be- 
tween crises  and  industrial  depressions.  Either 
of  these  two  classes  of  phenomena  may  appear 

'  Wagner  says :  "  Crises  imply  .  .  .  the  overwhelming  and 
simultaneous  occurrence  of  inability  on  the  part  of  independent 
entrepreneurs  to  pay  their  debts."  — "  Krisen,"  in  Rentzsch, "  Hand- 
worterbuch,"  p.  26.  Clement  Juglar  thus  defines  crisis :  "  The  com- 
mercial crisis,  as  in  disease,  is  a  critical  period.  The  all-important 
question  asked  by  those  caught  in  embarrassment  is  whether  they 
will  hold  out  or  succumb.  The  crisis  is  the  touchstone  which 
reveals  the  solidity  of  commercial  houses."  —  Say's  "  Dictionnaire," 
Sec.  I.  Mr.  Horace  White  gives  the  following :  "  Commercial  crises 
are  disturbances  of  the  course  of  trade  at  given  times,  arising  from 
the  necessity  of  readjusting  its  conditions  to  the  common  standard 
and  measure  of  value."  —  Article  "Commercial  Crises,"  Lalor's 
"Cyclopaedia,"  Vol.  I,  p.  523. 

*  To  this  Schaffle  also  agrees.  Herkner,  in  Conrad's  "  Hand- 
worterbuch,"  Bd.  IV,  Sec.  i,  p.  891.  Schaffle,  "  Handelspolitik," 
in  Bluntschh's  "  Deutsches  Staatsworterbuch,"  Bd.  IV,  p.  638. 
Schaffle  criticises  the  definitions  offered  by  Mill,  Juglar,  and  Max 
Wirth,  and  also  the  definition  of  Coquelin,  in  the  "  Dictionnaire 
de  I'Economie  Politique,"  that  crises  are  the  sudden  disappear- 
ances of  credit.  This  calls  to  mind  a  remark  made  by  John 
Mills  in  "The  Bank  Charter  Act  and  the  Late  Panic,"  p.  6, 
where,  in  speaking  of  the  crisis  of  1866,  he  says:  "A  volumi- 
nous magazine  writer  on  this  subject  considers  the  main  evil  to 
have  been  a  want  of  currency,  which  is  about  as  explicit  as  the 
jocular  diagnosis  that  a  man  died  of  *  want  of  breath.' " 

4 


INTRODUCTION 

independently  of  the  other ;  in  fact,  the  presence  of 
one  is  more  or  less  a  guarantee  of  immunity  from 
the  other.  By  some  writers  the  crisis  proper  is 
called  an  "  active  crisis,"  while  an  industrial  de- 
pression is  called  a  "passive  crisis."^  The  patho- 
logic terminology  which  is  frequently  employed  in 
the  discussion  of  crises  ^  enables  us  to  express  very 
well  the  distinction  between  crises  and  depressions. 
The  first  are  acute,  the  second  chronic  maladies  of 
industry.  The  causes  of  the  first  lead  rapidly  to  a 
climax  of  unnatural  and  unstable  conditions  which 
in  the  panic  find  their  rupture  and  give  place  to 
extreme  stagnation.  The  causes  of  depression 
appear  to  be  more  enduring.  They  weigh  down 
business  by  handicapping  disabilities  which  exert 
a  steady  pressure,  producing  dejection  and  prostra- 
tion. A  crisis  results  when  business  is  carried  to 
a  high  point  from  which  it  is  precipitated.  A  de- 
pression marks  the  struggle  of  industry  under  a 
weight  of  adverse  conditions. 

According  as  crises  have  more  or  less  conspicu- 
ously involved  disturbances  of  the  medium  of  ex- 
change, of  financial  institutions,  or  of  productive 
or  commercial  industry,  they  have  been  denomi- 
nated monetary,  financial,  commercial,  or  industrial 
crises.  These  varying  designations  are  useful  to 
indicate  the  causes  or  characteristics  of  individual 
crises.        A   more   general   term    and   one  which 

6  De  Viti  de  Marco,  cited  by  Lexis  in  Schonberg's  "  Handbuch," 
2  Aufl.,  Vol.  II,  Ch.  XXI,  Sec.  51. 

6  Neuwirth,  Roscher,  and  Schaffle,  for  example,  use  this. 

5 


ECONOMIC   CRISES 

involves    commitment    to   no   view   or    school    is 
economic  crisisJ 

While  the  crash  or  panic  is  the  particular  feature 
which  characterizes  the  modern  crisis,  no  consid- 
eration of  the  subject,  which  is  limited  to  this 
culminating  period  of  the  disturbance,  can  be  com- 
plete. The  circumstances  leading  up  to  the  climax 
can  only  be  distinguished  by  the  study  of  the  evo- 
lution of  a  crisis.^ 

"^  Wagner  uses  the  phrase  "  credit  crises  "  because  he  especially 
emphasizes  the  abuse  of  credit  as  a  cause  of  crises.  "  Overstock- 
ing of  the  market  is  usually  an  accompaniment  of  crises.  The 
name  overproduction  crisis  usually  suffices  therefore,  but  it  does 
not  express  so  exactly  the  nature  of  the  evil  as  the  name  credit 
crisis.  The  expression  money  crisis  is  indefinite,  since  the  word 
money  has  many  meanings;  capital  crisis  is  not  accurate  enough; 
commercial  crisis  is  one-sided,  for  crises  are  not  affairs  concerning 
commercial  circles  alone."  —  Rentzsch,  "  Handworterbuch,"  p.  526. 

The  following  division  of  crises  is  given  by  Max  Wirth :   "  In 
the  first  place,  there  are  two  sorts  of  crises  to  distinguish :  — 
I.    Crises  of  the  circulating  medium,  and 

II.   Crises  of  capital. 

The  first  are  divided  into  such  as  follow  distressing  experiences 
or  defective  arrangements  of  the  credit  and  money  machinery  of 
industry:  («)  a  congestion  of  the  circulating  medium;  (^)  those 
which  follow  an  immoderate  issue  of  irredeem.able  paper  currency, 
which  causes  a  sudden  rise  of  prices  and  unstable  fluctuations. 

Those  capital  crises  which  fall  under  II  may  be  subdivided 
into :  (a)  acute  diseases  of  production,  of  stock  market  specu- 
lation especially  accompanied  by  the  founding  of  new  enterprises, 
and  of  real  estate  values;  (3)  commercial  crises  proper  and  over- 
stocking of  the  product  market." 

*  It  is  the  business  of  the  student  to  examine  these  years  of 
business  history,  and  construct  in  theory  a  complex  of  forces 
which  will  account  for  the  phenomena.  Oechelhauser  says :  "  In 
our  opinion,  high  and  low  prices  do  not  stand  opposed  as  good 

6 


INTRODUCTION 

The  concentration  of  distress  upon  one  portion 
of  the  industrial  cycle  which  the  term  "  crisis  " 
implies  is  the  result  of  modern  economic  practices. 
The  division  of  function  which  was  first  planned 
between  man  and  man  has  been  extended  to  apply 
between  regions  and  countries.  The  organic  rela- 
tions which  have  resulted  have  produced  a  de- 
pendency of  part  on  part.  The  life  history  of  any 
industry  is  of  import  to  all.  Particularly,  however, 
have  the  institutions  connected  with  finance  and 
credit  worked  an  economy  of  effort  based  upon  the 
existence  of  normal  conditions.  The  crisis  reaches 
each  industry  through  the  interdependence  of  in- 
dustries, but  chiefly  through  the  relation  of  all 
industries  to  monetary  and  credit  institutions. 

The  importance  of  crises  as  a  subject  of  study 
is  commensurate  with  the  loss  which  they  inflict. 
The  industrial  life  of  the  nineteenth  century  can- 
not be  completely  presented  without  considering 
them.  As  Diihring  has  well  pointed  out  health 
and  disease  are  but  two  complementary  phases 
under  which  the  processes  of  life  manifest  them- 
selves. To  understand  the  social  organism  com- 
pletely we  must  study  it  in  disease  as  well  as  in 
health.9 

and  bad,  or  prosperous  times  and  calamitous  times,  but  they 
together  form  two  phases  of  the  same  critical  evolution.  The 
last  crisis  took  its  start  in  the  unusual  advance  of  prices  over 
values,  not  with  the  revolution  of  prices."  —  "Die  Wirthschaft- 
liche  Krises,"  p.  24. 

^  E.  Diihring,  "  Cursus  der  National-  und  Socialokonomie," 
Part  V,  Ch.  I,  p.  225.     Cf.  Cossa,  "An  Introduction  to  the  Study 

7 


ECONOMIC   CRISES 

The  striking  and  unusual  character  of  the  phe- 
nomena composing  a  crisis  calls  attention  to  them, 
but  sets  them  in  a  light  which  is,  on  the  whole, 
not  favorable  to  their  proper  scientific  observation. 
It  is  hard  to  recognize  in  the  crisis  the  result  of 
a  combination  of  familiar  forces.  The  interest 
which  invests  crises  attracts  many  to  their  study 
who  come  inadequately  equipped  by  previous 
training  in  the  observation  and  interpretation  of 
economic  phenomena.  Again,  in  the  study  of  so 
pronounced  a  subject,  arraying  interests  so  sharply 
against  one  another,  it  is  natural  that  opinions 
should  prevail  which  are  pronounced  rather  than 
judicious.  A  voluminous  partisan  literature  exists 
on  the  subject  of  crises  which  impedes  scientific 
research.  The  study  of  crises  is  difficult,  since  the 
crisis  is  a  period  of  rapid  transition.  Conditions 
are  not  permanent  enough  to  permit  of  elaborate 
examination  and  classification.  The  forces  which 
are  in  control  are  an  entirely  different  compound 
of  human  motives  than  that  which  usually  prevails. 

The  gradual  appearance  of  crises  within  a  com- 
paratively recent  period  and  as  an  accompaniment 
of  the  present  industrial  system,  gives  to  them  at 
once  a  definite  significance.  They  have  come  to 
us  in  company  with  industrial  freedom  and  indi- 
vidualism, with  the  factory  system,  the  extension 
of  foreign  commerce,  the  use  of  credit,  and  the 
other  features  which   mark  the  economic  life  of 

of  Political  Economy,"  London,  1893,  Theoretics,  Ch.  IV,  Sec.  2, 
pp.  47,  48. 

8 


INTRODUCTION 

this  century.  The  order  in  which  the  leading 
industrial  nations  began  to  experience  crises  is  a 
significant  fact,  as  is  to-day  the  varying  degrees  of 
intensity  with  which  these  storms  expend  them- 
selves in  different  countries.  It  helps  to  direct 
inquiry  to  know  that  crises  are  more  severe  and 
frequent  in  the  United  States  than  in  any  other 
country.  They  are  felt  in  progressively  diminish- 
ing force  in  England,  Germany,  France,  Holland, 
and  Switzerland.  The  comparative  study  of  the 
history  of  crises  suggests  the  wisdom  of  observing 
the  extent  to  which  various  nations  have  developed 
foreign  trade  and  adopted  credit  and  banks.  The 
study  of  race  psychology  is  not  foreign  to  the  sub- 
ject, nor  the  observation  of  national  honesty,  edu- 
cation, natural  conservatism,  and  the  speed  and 
energy  of  life.^*^  The  comparative  method  alone 
renders  it  possible  duly  to  subordinate  the  politi- 
cal situation,  the  peculiar  system  of  currency  pre- 
vailing, the  banking  system  adopted  by  a  nation, 
or  the  bankruptcy  legislation  in  force. 

Especially  significant  for  comparative  study  is 

1"  After  stating  that  crises  fall  where  the  credit  system  is  well 
developed,  Mr.  Horace  White  says :  "  It  is  an  observed  fact  that 
nations  of  Teutonic  origin  (including  the  English,  American, 
German,  Dutch,  and  Scandinavian)  are  most  frequently  and  se- 
verely affected  with  commercial  crises."  —  Lalor's  "Cyclopaedia," 
Vol.  I,  p.  524. 

De  Tocqueville  considered  that  the  temperament  of  democratic 
nations  was  particularly  favorable  to  crises,  since  in  them  economic 
ambitions  are  supreme.  —  "  Democracy  in  America,"  Boston,  18731 
Vol.  II,  Bk.  II,  Ch.  XIX,  p.  192. 

9 


ECONOMIC   CRISES 

the  international  or  world  crisis.  The  widespread 
disturbance  which  occurred  between  the  years  1836 
and  1839  in  most  nations,  and  the  crises  of  the 
years  1857,  1873,  and  1882,  deserve  to  be  desig- 
nated world-crises.^^  The  crisis  of  1825,  which 
affected  England  and  America  together  with  some 
other  countries,  and  which  arose  through  the  dis- 
turbance of  the  cotton  trade,  may  perhaps  be 
ranked  as  the  first  international  crisis.  In  1847 
the  condition  of  England  very  seriously  affected 
the  money  markets  of  Paris,  New  York,  and 
Amsterdam.  The  most  widespread  and  endur- 
ing international  crisis  was  probably  that  of  1873. 
This  susceptibility  of  the  whole  crisis  area  of  the 
world  to  be  drawn  from  time  to  time  into  one  con- 

^^  The  following  table  is  presented  by  Juglar  in  Say's  "  Diction- 
naire,"  to  show  the  solidity  of  France,  England,  and  the  United 
States  in  the  matter  of  crises.  Crises  of  more  or  less  severity 
have  occurred  at  the  dates  indicated :  — 


France 

England 

United  States 

1804   ....   1803  .... 

1810   . 

1810  . 

1813-14 

1815  . 

1814 

1818   . 

1818  . 

1818 

1825   . 

1825   . 

1826 

1830   . 

1830  . 

1836-39 

1836-39 

1837-39 

1847   . 

1847  • 

1848 

1857   . 

1857  . 

1857 

1864   . 

1864-66 
1873  • 

War 
1873 

1882   . 

1882  . 

1882 

Compare  this  list  with  the  one  given  in  Ch,  VII. 


10 


INTRODUCTION 

vulsion,  shows  a  high  degree  of  economic  inter- 
dependence. 

The  question  whether  crises  are  increasing  in 
severity  has  been  a  much  mooted  one.  The  mat- 
ter presents  a  different  appearance  according  to 
whether  a  long  or  short  industrial  period  is  con- 
sidered. Taking  the  entire  history  of  crises  into 
account,  an  increase  in  the  severity  of  crises  seems 
certain.  During  the  last  half  century,  however, 
crises  appear  to  be  losing  something  of  their  in- 
tensity, but  to  be  approaching  the  character  of 
industrial  depressions  as  the  period  of  recovery 
after  a  crisis  is  lengthened. ^^ 

The  place  which  the  subject  of  crises  should 
occupy,  in  a  systematic  treatise  upon  political 
economy,  is  not  definitely  fixed.  For  German 
economists,  who  divide  their  works  into  theoreti- 
cal and  practical  economics,  the  matter  presents 
little  difificulty,  although  the  discussion  of  crises 
is  by  no  means  always  placed  in  the  latter  divi- 
sion.^^     For  those  who  hold  rigidly  to  the  English 

12  In  the  "  First  Annual  Report  of  the  Commissioner  of  Labor," 
upon  "  Industrial  Depressions,"  occurs  the  following :  "  As  already 
stated,  the  features  of  regularity  and  contemporaneousness  of  crises 
and  depressions  have  been  apparent  since  the  commencement  of 
this  century.  Crises  and  panics,  with  more  or  less  of  industrial 
depression  accompanying  them,  have  occurred  in  various  coun- 
tries, but  there  were  not  such  strong  connecting  influences  and 
facts  and  associated  conditions  as  have  been  observed  during  the 
past  fifty  years."  —  Ch.  I,  p.  15. 

1^  "A  review  of  the  literature  of  crises  discovers  the  fact  that  the 
position  which  this  theory  has  occupied  in  economic  science  has 
been  an  extremely  varied  one.     Without  considering  that  the  sub- 

II 


ECONOMIC   CRISES 

division  of  the  science  into  Production,  Exchange, 
Distribution,  and  Consumption,  the  adjustment  of 
the  subject  into  the  general  scheme  of  arrange- 
ment is  more  difficult.  The  crisis  involves  so 
many  economic  functions  that  it  cannot  be  ade- 
quately treated  within  the  boundaries  of  any  one 
of  the  departments  of  economic  science.  Impor- 
tant considerations  arise  when  the  subject  is  looked 
upon  from  each  of  the  view-points,  —  Production, 
Exchange,  Distribution,  and  Consumption.  It 
lies  athwart  these  lines  of  demarkation.  From 
the  standpoint  of  crises  it  is  possible  to  judge 
every  important  economic  tendency,  and  study 
every  economic  institution.  If  crises  are  disturb- 
ances of  the  equilibrium  between  production  and 
consumption,  they  evidently  concern  both  these 
functions  as  well  as  the  methods  of  adjusting  the 
two  with  which  Exchange  and  Distribution  have 
to  do.  In  accordance  with  this  view  we  find  such 
writers  as  Professor  R.  T.  Ely,  presenting  some 
special  aspects  of  the  subject  of  crises  in  each  of  the 
divisions  of  theoretical  economics,  while  emphasiz- 
ing especially  the  connection  between  crises  and  the 

ject  is  taken  up  at  times  in  the  general,  then  in  the  special,  part 
of  economic  science,  and  sometimes  in  both,  we  find  its  position 
in  General  Economics  variable.  Often  it  is  treated  under  Pro- 
duction, as  a  disturbance  of  the  same;  again  and  most  frequently 
it  is  taken  up  in  Exchange;  at  times  in  Consumption,  as  is  the 
practice  with  Roscher,  who  considers  all  crises  to  be  disturbances 
of  the  balance  between  production  and  consumption.  Rodbertus- 
Jagetzow  considers  crises  under  the  caption  Distribution."  —  Was- 
SERRAB,  "  Preise  und  Krisen,"  p.  39. 

12 


INTRODUCTION 

process  of  consumption.  Francis  A.  Walker,  in 
his  "  Political  Economy,"  set  apart  for  the  consid- 
eration of  crises  a  portion  of  the  last  chapter  under 
the  subject  of  Exchange,  entitling  it  "  The  Reac- 
tion of  Exchange  upon  Production."  ^^  J.  S.  Mill 
lays  some  of  the  fundamental  propositions  neces- 
sary to  his  development  of  the  subject  in  Book  I, 
on  Production,  others  in  Book  II,  on  Distribution, 
and  he  finally  brings  out  his  theory  in  Book  IV, 
entitled,  "  Influence  of  the  Progress  of  Society  on 
Production  and  Distribution." 

Turning  to  the  theories  which  have  been  con- 
structed to  account  for  crises,  we  have  first  to 
notice  some  of  the  limitations  of  economic  theory 
which  concern  us.  As  is  to  be  expected  in  the 
case  of  so  striking  and  intricate  a  subject,  a  truly 
enormous  number  of  theories  have  been  expounded 
to  explain  crises.  The  "  First  Annual  Report  of 
the  Commissioner  of  Labor,"  which  was  devoted 
to  the  subject  of  industrial  crises  and  depressions, 
enumerates  the  following  assigned  causes  of  crises : 
Railway  speculation,  under-,  over-,  misdirected,  and 
unsteady  consumption,  contracted,  inflated,  depre- 
ciated, or  fluctuating  currency,  machinery,  various 
kinds  of  laws,  debt,  intemperance,  monopoly,  spec- 
ulation, tariff,  and  taxation.  These  are  but  a  few 
of  the  particular  arraignments,  while  bad  sanitary 
conditions,  free  passes,  education  too  exclusively 
intellectual,  coolie,  convict,  female,  child,  and  im- 

"  "Political  Economy"  (advanced  course),  Part  III,  Ch.  VII. 
13 


ECONOMIC   CRISES 

ported  labor  come  in  for  a  share  of  the  blame. 
The  enumeration  rounds  well  up  to  the  border 
of  the  ridiculous  with  the  mention  of  such  causes 
as  absence  of  caste,  and  instinctive  and  wide- 
spread indolence.  Concerning  the  collapse  of 
1878,  Mr.  Walter  Stanley  Jevons  wrote,  in  his 
essays  on  Currency  and  Finance :  "It  is  curious 
to  notice  the  variety  of  the  explanations  offered 
by  commercial  writers  concerning  the  course  of 
the  present  state  of  trade.  Foreign  competition, 
beer  drinking,  over-production,  trades-unionism, 
war,  peace,  want  of  gold,  superabundance  of  sil- 
ver. Lord  Beaconsfield,  Sir  Stafford  Northcote, 
their  extravagant  expenditure,  the  Government 
policy,  the  Glasgow  bank  directors,  Mr.  Edison 
and  the  electric  light,  are  a  few  of  the  happy  and 
consistent  suggestions  continually  made  to  explain 
the  present  disastrous  collapse  of  industry  and 
credit."  To  this  list  a  malicious  reader  might  add 
"  sun-spots."  ^^ 

The  literature  devoted  to  crises  is  full  of  discus- 
sions of  the  purely  local  and  incidental  features  of 
individual  crises.     The  external  and  apparent  has 

^^  Many  opinions  concerning  the  origin  of  crises  have  been 
expressed  by  economic  writers  which  have  not  been  taken  up 
to  any  extent  by  students  of  the  subject.  Laveleye  emphasizes 
the  derangement  of  the  balance  of  trade  leading  to  the  exporta- 
tion of  precious  metals  as  the  cause  of  contractions  of  credit  liable 
to  bring  on  crises.  Bonamy  Price  attributes  crises  to  a  diminution 
of  the  means  of  buying.  Nasse  dwells  upon  the  effect  of  changes 
due  to  progress.  Leroy-Beaulieu  brings  forward  the  importance 
of  commercial  treaties  and  of  commercial  legislation  in  general. 

14 


INTRODUCTION 

always  been  seized  upon.  Without  comparative 
study  it  is  impossible  to  establish  a  perspective 
within  the  subject  which  permits  the  subordina- 
tion of  local  and  incidental  causes  to  those  more 
fundamental.  The  literature  which  appears  dur- 
ing and  immediately  after  a  crisis,  and  which  con- 
tains only  an  analysis  of  that  crisis,  cannot  be 
expected  to  contribute  much  to  a  well-balanced 
discussion  of  the  subject.  Writers  who  only  ven- 
ture into  the  field  when  stirred  by  local  happen- 
ings, are  likely  to  be  permeated  by  local  prejudices 
and  inflamed  by  prevailing  social  and  economic 
controversies.^*^  When  it  has  been  determined  that 
any  crisis  is  unusual  in  character  and  in  its  causes 
departs  from  the  type,  then  we  must  look  with 
distrust  upon  all  literature  known  to  have  been 
particularly  inspired  by  it.  The  crises  of  the 
latter  part  of  the  seventeenth  century  and  the 
first  part  of  this  century  seem,  as  a  rule,  to  have 
been  the  result  of  peculiar  and  unusual  combina- 
tions of  events.  The  conditions  under  which  they 
occurred  are  so  different  from  those  prevaiUng 
since,  that  it  may  be  safely  said  that  little  of  value 
can  be  found  in  discussions  published  prior  to  1837. 

^6  "  As  is  often  the  case,  in  the  study  of  crises  and  in  distin- 
guishing their  successive  periods,  theory  has  gone  ahead  of 
practice.  It  need  not  excite  surprise  that  that  theory  was  for 
iwenty-five  years  considered  one  of  the  most  obscure  in  eco- 
nomics. Each  author,  maintaining  his  own  point  of  view,  has 
indicated  such  causes  of  crises  as  best  agree  with  the  system 
of  thought  he  has  accepted  or  built  up."  —  Clement  Juglar  in 
Say's  "  Dictionnaire." 

15 


ECONOMIC   CRISES 

In  the  literature  of  crises  the  tendency  has  until 
recently  been  strong  to  consider  the  last  link  in  a 
chain  of  causes  as  the  only  one  of  importance. 
The  crash  of  a  panic  has  been  observed  to  the 
neglect  of  the  pre-crisis  period  in  which  the  secret 
of  causes  lies.^'''  Financial  and  credit  institutions 
have  received  undue  attention  because  through 
them  unstable  conditions  are  first  brought  to 
rupture. 

Not  only  are  the  varying  phases  of  the  history 
of  commercial  convulsions  reflected  in  theories  of 
crises,  but  so  also  are  the  prevailing  social  and 
economic  ideas.  As  Friederich  A.  Lange  has 
said,  "We  examine  a  science,  and  we  find  in  its 
doctrines  only  the  mirror  of  social  conditions."  ^^ 
It  is  human  nature  that  good  results  or  qualities 
should  be  referred  most  easily  to  causes  or  objects 
which  already  have  a  favorable  character  in  our 
estimation.  Bad  actions  are  laid  at  the  door  of 
those  whom  we  believe  to  be  bad.  Crises  have 
been  time  out  of  number  laid  at  the  door  of  the 
opposite  political  party,  the  disliked  financial  sys- 

1^  "  In  all  economic  questions,  one  can  note  the  tendency  of 
observers  to  trace  great  consequences  back  to  some  single  cause 
which,  by  accident,  is  known  or  understood  by  them.  This  ten- 
dency has  especially  manifested  itself  in  the  judgments  which  have 
been  formed  regarding  the  causes  of  periods  of  speculation  and 
commercial  crises,  and  in  general  regarding  phenomena  connected 
with  money  and  credit."  —  A.  Wagner,  "Die  Geld-  und  Credit- 
theorie  der  Peel'schen  Bankacte,"  p.  257. 

18  "History  of  Materialism"  (2d  ed.),  Boston,  1879-81,  Vol. 
Ill,  p.  233. 

16 


INTRODUCTION 

tern,  and  the  economic  class  with  whose  interest 
one's  own  is  not  coincident.  This  kind  of  work  is 
on  an  intellectual  level  with  the  practices  of  those 
villagers  of  past  centuries  who  evolved  the  idea  of 
a  witch,  attributing  the  sickness  and  deaths  of  the 
community  to  the  influence  of  old  women  who 
were  primarily  disliked  for  their  ugly  appearance 
and  temper. 

The  history  of  crises  has  often  been  made  an 
arsenal  from  which  were  to  be  drafted  arguments 
for  political  and  economic  polemics.  The  theory 
of  crises  has  been  a  handle  in  many  arguments, 
and  has  been  subordinated  to  the  purpose  of  first 
one  popular  discussion  and  then  another. 

As  between  the  French,  German,  and  English 
literatures  of  the  subject  some  comparisons  may 
be  made.  In  France,  the  literature  of  crises  was 
for  a  long  and  important  period  a  mere  side-light 
in  the  discussion  of  the  freedom  of  bank-note 
issue.  French  scientific  economic  literature,  in 
common  with  the  English,  brings  the  subject  of 
crises  into  connection  with  the  dispute  over  the 
law  of  markets  or  over-production.  English  writers 
for  some  time  only  mentioned  crises  to  connect 
them  in  one  way  or  another  with  the  expositions 
of  the  "Currency  School"  or  to  use  them  in  the 
defence  or  attack  of  the  Peel  Bank  Act  of   1844. 

That  the  theory  of  crises  should  have  been  until 
the  last  three  decades  involved  in  abstract  discus- 
sions of  over-production,  currency,  and  interna- 
tional trade  is  not,  broadly  speaking,  accidental. 
c  17 


ECONOMIC   CRISES 

Before  the  period  mentioned  the  ideals  and 
methods  of  the  exact  sciences  prevailed  and  in- 
fluenced economics.  Such  subjects  were  naturally 
chosen  as  best  fitted  these  methods,  and  economics 
was  built  with  the  idea  of  an  exact  science  in  mind. 
More  recently  the  biological  sciences  have  been 
built  up.  They  now  exert  an  influence  as  ideals, 
while  the  inductive  method  appropriate  to  them 
has  extended  its  influence. 

Germany  brings  a  double  contribution,  namely, 
that  of  the  socialists  and  that  of  scientific  econo- 
mists. These  two  are  relatively  distinct.  The 
contribution  of  the  socialists  to  the  subject  is  very 
considerable.  German  scientific  literature  is  not 
greatly  influenced  so  far  as  the  theory  of  crises  is 
concerned  by  socialistic  thought,  and  is  free  from 
prolonged  entanglement  with  any  other  discussions 
such  as  arose  in  England  or  France.  It  is  in  Ger- 
many, therefore,  that  we  find  the  most  systematic 
and  unprejudiced  discussions  of  crises. 

Before  proceeding  to  consider  the  various  theo- 
ries of  crises  it  may  be  well  to  say  a  word  con- 
cerning diversities  of  view.  The  differences  of 
position  taken  by  writers  is  very  frequently  more 
apparent  than  real.  Of  a  number  of  investigators 
who  perceive  that  crises  result  from  a  divergence 
between  supply  and  demand,  some  will  speak  of 
over-production  and  others  of  under-consumption. 
Of  a  number  who  examine  the  fluctuation  of 
demand  and  single  out  as  the  cause  of  crises  the 
failure  of  the  effective  demand  of  wage-earning 


INTRODUCTION 

classes,  some  will  maintain  that  the  institution  of 
private  property  permits  capitalists  to  defraud 
wage-earners  and  will,  with  Rodbertus,  hold  a 
socialistic  theory.  Others,  like  Robert  Owen,  will 
see  most  clearly  the  influence  of  machinery  in 
these  results,  and  will  frame  a  mechanical  and 
technical  problem.  Others  still  may,  with  Br^n- 
tano,  look  upon  the  condition  of  the  wage-earner 
as  due  primarily  to  his  intelligence  and  providence 
or  improvidence,  and  will  thus  constitute  out  of  the 
matter  a  moral  problem. 

Let  us  proceed  to  the  statement,  in  as  favorable 
a  light  as  may  be,  of  the  chief  theories  explaining 
crises.  The  presentation  in  the  following  chapters 
will  be  dominated  by  the  idea  of  making  each  new 
point  of  view  a  position  from  which  certain  impor- 
tant aspects  of  the  subject  may  be  best  elucidated. 
The  chapters  which  follow  form,  therefore,  at  once 
a  systematic  discussion  of  crises  and  a  presentation 
of  the  chief  theories  of  crises. 

RESUME 

I.  Definition  :  (a)  of  a  crisis  cycle  ;  of  a  crisis  ;  (d)  distinc- 
tion between  crises  and  depressions ;  (c)  types  of 
crises  —  the  monetary,  financial,  commercial,  and  in- 
dustrial crises  ;  the  economic  crisis. 
II.  The  culmination  of  a  crisis  cycle  in  a  crisis  accounted  for 
by  the  solidarity  of  economic  interests  and  modern 
credit. 
III.  Importance  of  the  study  commensurate  with  the  losses 
inflicted  by  crises.  Social  ills  reveal  important  aspects 
of  social  forces. 

19 


ECONOMIC   CRISES 

IV.  Difficulty  of  study  caused  by  (a)  the  complex,  striking, 
unusual,  and  temporary  character  of  the  phenom- 
ena ;  (i>)  untrained  observation ;  (c)  partisan  opin- 
ions. 
V.  Guiding  general  facts :  (a)  crises  appeared  with  the 
present  industrial  system,  with  industrial  freedom, 
the  factory  system,  foreign  commerce,  and  credit ; 

(d)  geographical  distribution  of  crises  —  the  world 
crisis. 

VI.    Place  of  subject  in  economic  treatises.     It  does  not 
adjust  itself  to  the  four-part  division  of  economics 
into  Production,  Exchange,  Distribution,  and  Con- 
sumption. 
VII.    Limitations  of  economic  theory  :  — 

(<z)  Large  number  of  theories  advanced. 
{6)  Discussions  devoted  to  local  and  incidental  fea- 
tures. 
(c)  Literature  growing  out  of  abnormal  economic 

crises  likely  to  be  worthless. 
(i/)  Little  work  of  value  prior  to  1837. 

(e)  Undue  prominence  of  the  "  crash  "  and  of  credit 

institutions  in  studies  of  crises. 
(/)  Theory  of  crises  used  as  a  handle  in  various 
economic  and  political  discussions. 

(g')  French  theory  and  the  question  of  freedom  of 
bank-note  issue. 

(^)  English  theory  and  the  Peel  Bank  Act  of  1844. 

(/)  German  socialistic  and  scientific  contributions. 
Both  of  value.     The  latter  the  most  unpreju- 
diced body  of  discussion  extant. 
VIII.    Caution  regarding  apparent  and   real  divergences  of 

opinion. 


CHAPTER   II 

INDUSTRIAL   EQUILIBRIUM 

A  PROMINENT  place  is  given  in  the  science  of 
economics  to  the  idea  of  an  equilibrium.  The 
forces  of  supply  and  demand  bring  about  condi- 
tions of  equilibrium  which  are  marked  by  price 
quotations,  and  which  serve  as  a  guide  and  crite- 
rion for  the  movement  of  economic  interests.  The 
simplest  conception  of  an  economic  equilibrium  is 
that  which  makes  it  resemble  a  pair  of  scales,  in 
which  are  balanced,  on  one  side,  utilities,  on  the 
other,  the  costs  of  production  involved.  An  ex- 
tension of  this  conception,  necessitated  by  the 
entrance  of  the  evolutionary  doctrine  into  science 
and  the  introduction  of  the  historical  method  in 
economics,  has  regard  to  changes  in  the  costs  of 
production  and  in  men's  wants,  which  are  accom- 
modated by  an  equilibrium  ever  changing,  but  ever 
being  renewed.  The  dynamic  conception  of  an 
equilibrium  is  the  only  one  which  can  be  em- 
ployed in  an  extended  examination  of  economic 
phenomena. 

The  first  impression  which  the  crisis  gives  to 
the  student  of  political  economy  is  that  the  normal 
adjustment  of  economic  forces  has  been  violently 


ECONOMIC   CRISES 

disturbed.  The  ratios  of  exchange,  indicated  by 
prices,  are  abnormal.  They  imply  the  severest 
hardships  to  the  industries  of  a  country. 

Granted  that  in  a  crisis  the  normal  relations  of 
supply  and  demand  have  been  destroyed,  we  may 
ask  what  are  the  causes  of  the  disturbance. 

An  examination  of  the  literature  dealing  with 
economic  crises  shows  that  the  theories  which 
have  been  advanced  to  answer  this  question  may 
be  divided  into  two  classes.  First  are  those  which 
assign  some  specific,  immediate,  and  actuating 
cause,  of  such  a  character  that  no  law  can  be 
formulated  as  to  its  recurrence.  Second,  we  may 
group  together  all  those  explanations  of  crises 
pointing  out  an  inherent  tendency  of  industry 
which,  when  not  counteracted,  leads  to  recurring 
periods  of  distress. 

It  may  be  well,  before  taking  up  the  study  of 
those  economic  tendencies  which  lead  to  crises,  to 
group  together  in  this  chapter  for  convenient 
treatment  the  heterogeneous  "  accidental "  causes 
which  have  been  pointed  out  by  various  writers,  at 
different  times,  as  the  cause  of  this  or  that  crisis. 
A  group  of  writers,  among  the  most  prominent  of 
whom  is  Wilhelm  Roscher,  have  presented  the  idea 
that  the  present  industrial  system  tends  to  pre- 
serve a  stable  equilibrium,  and  that  there  are  no 
persistent  or  recurrent  tendencies  operating  to 
break  down  the  adjustment  which  normally  pre- 
vails between  demand  and  supply.  Such  writers, 
among  whom  we  may  include  Nasse,  Lugo  Bren- 


INDUSTRIAL  EQUILIBRIUM 

tano,  Garnier,  and  perhaps  Max  Wirth,^  scout  the 
idea  of  a  definite  periodicity  of  crises,  holding  that 
they  result  from  unforeseen  occurrences,  or  acciden- 
tal junctures  in  the  life  history  of  trade.^ 

These  writers  and  their  followers  all  recognize, 
however,  that  the  nineteenth-century  economy  is 
not  the  same  as  that  which  preceded  it.  Changes 
have  taken  place  which  have  resulted  in  making 
industry  sensitive  to  destructive  influences  once 
unknown.  Such  changes  are  the  division  of  labor 
and  the  application  of  capital  to  industry,  which 

1  The  list  of  crises-producing  causes  enumerated  by  Max  Wirth 
is  as  follows:  (i)  Harvest  failures;  (2)  Discovery  of  new  deposits 
of  coal,  metals  —  particularly  of  the  precious  metals;  (3)  Inven- 
tions; (4)  Opening  or  closing  of  commercial  routes  and  of  mar- 
kets; (5)  War  and  revolutions;  and,  (6)  Leading  to  depression 
of  trade,  the  depreciation  of  the  currency.  "  Grundziige  der 
National  Oekonomie,"  Bd.  Ill,  p.   57. 

2  "  The  germs  of  crises  lie  in  unusual  economic  phenomena 
which  stimulate  production  and  industry  generally  to  forsake  its 
beaten  path,  and  which  call  forth  unwonted  activity  in  various 
parts  of  the  economic  organism."  —  Max  Wirth,  "  Grundziige  der 
National  Oekonomie,"  3  Aufl.,  Bd.  Ill,  p.  57.  "The  feverish 
activity  of  the  market  and  the  abnormal  inflation  of  prices  are 
always  the  result  of  peculiar  causes,  for  the  operation  of  which 
the  previous  depression  of  industry  has,  indeed,  prepared  the 
way,  but  which  exert  throughout  an  independent,  actuating  influ- 
ence. Periods  of  depression  give  way  to  a  gradual  revival  of 
commerce  when  such  peculiar  causes  are  not  present,  or  when 
the  evolution  is  not  suddenly  interrupted  by  such  disturbing  events 
as  war  or  the  declaration  of  peace.  Such  a  trade  revival  continues 
uninterrupted,  unless  checked  by  some  new  disturbing  influences." 
—  Nasse,  "  Ueber  die  Verhiitung  der  Productionskrisen,"  Jahrbuch 
fiir  Gesetzgebung,  Bd.  Ill,  N.  F.  1879,  p.  150.  Cf.  Roscher, 
"System  der  Volkswirthschaft,"  Bd.  Ill,  p.  783. 

23 


ECONOMIC   CRISES 

increase  the  interdependence  of  industrial  units. 
These  also,  by  lengthening  the  chain  of  connected 
productive  processes,  lengthen  the  time  during 
which  disturbing  changes  may  occur.  Both  the 
solidarity  and  the  sensitiveness  of  business  condi- 
tions are  increased  by  the  use  of  credit.  It  was 
with  the  economy  and  moral  beauty  of  credit  in 
mind,  but  yet  remembering  the  crisis,  that  Roscher 
spoke  of  crises  as  "  the  shadow  side  of  progress 
itself."  3 

Under  some  circumstances  the  industrial  system 
may  be  said  to  be  in  unstable  equilibrium,  as  when 
a  country  possesses  a  system  of  unsound  banks  or 
an  unregulated  paper  currency.  The  course  of 
foreign  commerce  is  usually  recognized  as  less  sta- 
ble and  reliable  than  that  of  home  trade.  Hence, 
the  growth  of  international  commerce  opens  the 
trade  of  a  country  to  many  new  disturbing  influ- 
ences. Agriculture  and  the  other  extractive  in- 
dustries are  less  susceptible  to  injury  than  are 
manufacture  and  commerce,  because  the  goods 
.which  they  produce  are  in  the  least  possible  de- 
gree specialized,  and  therefore  sealed  for  specific 
commercial  uses.  These  industries  are  adaptive, 
since,  if  one  outlet  is  closed,  the  goods  may  be 
fitted  for  another  use.  Each  branch  of  manu- 
facture must  follow  the  course  of  some  specific 
demand,  and  commerce  must  suffer  by  any  read- 
justment of  supply  and  demand  areas.     We  may 

^  Roscher,  "  Ansichten  der  Volkswirthschaft,"  Bd.  II,  Sec.  4, 
P-  385- 

24 


INDUSTRIAL   EQUILIBRIUM 

say  furthermore  that  capital  invested  in  agriculture 
is  not  so  rapidly  impaired  while  lying  idle  as  is 
capital  invested  in  manufacturing  and  commercial 
enterprises.*  The  bonds  of  credit  linking  these 
various  parts  of  a  country's  industries  together  by 
credit  and  debtor  relations  put  the  whole  economic 
organism  in  a  position  to  suffer  from  the  reverses 
which  come  to  the  least  stable  elements  compos- 
ing it.  Whatever  in  any  way  extends  the  market, 
therefore,  or  complicates  business,  if  it  is  accom- 
panied by  a  corresponding  increase  in  economic 
solidarity,  makes  larger  the  area  within  which 
crisis-producing  causes  may  appear. 

Having  noticed  how  liable  the  machinery  of  in- 
dustry is  to  become  deranged,  it  remains  to  con- 
sider that  group  of  the  actuating  causes  of  crises 
which  has  been  selected  for  treatment  in  this  chap- 
ter, namely,  the  unpredictable  ones.  Beginning 
with  those  considerations  which  belong  to  the 
department  of  Production,  in  economic  science, 
we  may  lirst  mention  invention,  which  has  for  its 
immediate  effect  a  revolution  in  the  technique  of 
some  industry.  Invention  changes  the  proportions 
in  which  the  factors  of  production  are  related  to 
one  another  in  industry,  readjusts  industries  to  one 
another  in  the  scale  of  importance,  and  changes 

*  The  varying  degrees  of  sensitiveness  to  derangement  which 
economic  enterprises  display  is  an  important  consideration  in  con- 
nection with  the  laying  of  taxes,  for  it  determines  in  a  measure 
the  reliability  of  the  various  sorts  of  public  revenue.  Cf.  H.  G 
Adams,  "Taxation  in  the  United  States  1789-1816  "  (Johns  Hop- 
kins Studies),  Vol.  II,  pp.  69,  70. 

25 


ECONOMIC   CRISES 

the  territorial  relations  of  producing  areas.  The 
gradual  accumulation  of  improvements,  which  is 
often  allowed  to  grow  unheeded  by  capitalists 
whose  money  is  invested  in  equipped  plants,  forms, 
from  time  to  time,  a  crushing  advantage  for  new 
enterprises  starting  with  all  the  latest  devices 
known  to  the  trade.  During  the  early  part  of 
the  century  the  advent  of  a  new  invention  was 
not  accompanied  with  great  loss  of  fixed  capital, 
because  at  that  time  capital  was  for  the  first  time 
let  into  the  productive  process  on  a  large  scale  by 
these  inventions,  and  the  change  meant  the  use  of 
expensive  equipment  for  the  first  time.  At  pres- 
ent great  inventions  are  coming  more  and  more 
to  mean  the  destruction  of  large  amounts  of  fixed 
capital,  which  have  been  invested  to  utilize  pre- 
vious inventive  achievements. 

The  opening  of  a  new  means  of  communication 
has  an  effect  in  some  respects  similar  to  that  of  an 
invention.  The  European  markets  were  convulsed 
by  the  opening  of  the  Suez  Canal.  The  opening 
of  a  new  market  has  frequently,  in  the  past,  led 
*to  ill-advised  productive  activity,  resulting  in  great 
loss.  The  requirements  of  a  new  market  are  at 
first  imperfectly  understood,  especially  if  it  is  in 
an  undeveloped  country.  Optimism  and  the  love 
of  stimulating  news  serve  generally  to  exaggerate 
the  importance  of  an  unknown  demand.  One  has 
only  to  recall  the  "Mississippi  Scheme"  of  1718 
and  1719  and  the  "South  Sea  Bubble"  of  1720 
in   confirmation   of   this.     Overestimation   of   the 

26 


INDUSTRIAL   EQUILIBRIUM 

markets  of  Brazil  and  of  Spanish  America  con- 
tributed principally  to  the  distress  in  England  in 
1810.  In  1824  and  1825  the  markets  of  Peru  and 
Mexico  were  overestimated,  and  in  1843  those  of 
China  were  likewise.  European  manufacturers 
have  been  prone  to  ship  what  they  wanted  to  sell, 
as  regards  assortments,  quality,  and  style,  rather 
than  what  the  market  demanded.  A  realization 
of  the  importance  of  early  establishing  trade  con- 
nections, in  order  to  "hold  the  field  "  against  com- 
petitors, leads  to  activities  which  anticipate  in  too 
great  a  degree  the  development  of  a  new  field. 
This  leads  to  such  conditions  as  prevailed  in  Cali- 
fornia in  September,  1850.  When  a  collapse  does 
not  follow  the  first  receipt  of  accurate  information 
regarding  the  condition  and  capacity  of  a  new 
market,  a  second  stage  of  the  process  is  entered, 
in  which  European  capital  and  methods  are  rashly 
applied  to  stimulate  the  local  industries.  When 
the  crash,  which  is  almost  certain  to  come,  lays 
low  the  colonial  industry,  European  houses  con- 
nected therewith  are  often  brought  down  in  the 
general  ruin.  This  is  illustrated  by  the  case  of 
the  Baring  failure  in  England  in  the  summer  of 
1890.  Unfounded  trade  expansion  in  the  home 
countries,  such  as  that  which  was  connected  with 
the  opening  of  California,  is  not  likely  to  occur  in 
the  future,  because  of  the  improvement  of  means 
of  communication ;  but  the  hasty  and  inconsider- 
ate application  of  European  methods  in  a  tropical 
climate,  with  strange  flora,  fauna,  and  with  non- 
27 


ECONOMIC   CRISES 

European  people,  to  bring  about  a  forced  growth 
of  industry  through  the  use  of  European  capital, 
is  likely  yet  to  lead  to  trouble. 

The  laying  of  import  duties,  a  practice  common 
among  new  countries  after  reaching  a  certain  stage 
of  development,  offers  a  prolific  cause  of  uncer- 
tainty in  trade  with  new  markets.  A  tariff  brings 
about  an  artificial  distribution  of  industry  which 
then  must  hang  upon  the  course  of  legislation  and 
indirectly  upon  the  fortune  of  political  parties. 
A  tariff  in  a  growing  country  must  be  revised 
from  time  to  time.  Furthermore,  a  tariff  tends 
to  build  up  interests  which  exert  a  pressure  to 
secure  revisions  advantageous  to  themselves.  The 
system  must  therefore  be  pronounced  an  unstable 
one.  The  history  of  tariffs  shows  that  the  system 
is  "a  thing  of  shreds  and  patches."  In  connec- 
tion with  crises  the  unstability  and  artificiality  of 
tariffs  is  the  chief  subject  of  remark.^ 

^  The  opinion  of  the  business  men  of  this  country  who  are  not 
intrenched  in  monopoHes  may  be  judged  from  the  well-indorsed 
sentiment  of  the  National  Board  of  Trade,  as  expressed  in  Wash- 
ington in  January,  1895,  ^X  ^I""-  Helman  of  Cleveland:  "The 
gravest  dangers  from  present  methods  of  tariff  discussion  and 
legislation  are  found  in  the  constant  menace  to  the  business 
interests  of  our  country.  History  tells  us  that  the  various  changes 
from  low  to  high  and  high  to  low  tariff  between  1832  and  1880 
led  to  periods  of  undue  inflation,  great  demoralization,  prosperity, 
and  depression.  Uncertainty  has  always  acted  as  a  damper  on 
trade,  and  even  the  mere  suggestion  of  a  possible  change  in 
revenue  rates  has  operated  to  unsteady  business  and  hinder  pro- 
duction. In  the  language  of  the  resolution  presented  to  this 
body,  twice  within  the  last  two  years  have  we,  by  overwhelming 

28 


INDUSTRIAL   EQUILIBRIUM 

In  this  connection  attempts  to  form  monopoly 
may  be  mentioned.  When  these  attempts  are  in 
the  form  of  getting  "  a  corner  "  on  the  market, 
great  and  possibly  destructive  price  fluctuations 
may  result.  Attention  must  be  called  to  the  char- 
acter of  the  trust  wars,  at  present  becoming  famil- 
iar to  us,  and  in  all  probability  to  be  made  more 
familiar  in  the  future.  These  struggles  may  al- 
most be  called  the  wars  of  the  giants.  The  invest- 
ments of  capital  and  the  numbers  of  wage-earners 
involved  are  so  great  as  to  make  them  a  matter 
of  public  solicitude. 

A  cause  of  crises,  which  may  be  considered  to 
fall  under  the  head  of  Exchange  in  economics,  is 
the  course  of  the  precious  metals.  As  these  metals 
form  the  most  important  elements  of  the  exchange 
medium  of  trade,  and  as  every  socio-economic 
activity  is  influenced  by  changes  in  the  medium 
of  exchange,  the  circumstances  which  affect  the 
value  of  gold  and  silver  are  most  important.^  The 
value  of  these  metals  is,  in  a  greater  degree  than 

majorities,  reversed  the  national  system  of  raising  revenues,  and 
twice  placed  in  jeopardy  the  business  interests  of  the  country  by 
making  uncertain  for  months  the  outcome  of  legislation  touch- 
ing the  exchange  value  of  every  article  in  trade.  Every  observer 
knows  that  there  need  be  no  actual  legislation  to  involve  great 
risk.  The  mere  suggestion  of  possible  action  is  sufficient  to  stir 
the  commercial  world  and  to  produce  alarm  and  even  serious 
disturbance  in  trade."  —  "Proceedings,"  1895,  PP-  ^3°'  'S'- 

^  Emile  de  Laveleye  considers  that  the  fluctuations  occasioned 
by  the  settlement  of  the  balance  of  trade  and  the  resulting  move- 
ment of  the  precious  metals  are  responsible  for  crises.  "  Revue 
des  Deux  Mondes,"  1865,  pp.  445  ff. 

29 


ECONOMIC   CRISES 

is  true  of  most  other  substances,  dependent  upon 
legislation.  This  suggests  a  source  of  economic 
insecurity.  The  crisis  of  1893  in  the  United 
States  was,  in  part,  due  to  distrust  of  the  integrity 
of  our  currency,  caused  by  the  operation  of  the 
Sherman  Law,  and  by  the  existence  of  a  strong 
free  silver  sentiment.  The  physical  conditions 
governing  the  supply  of  gold  and  silver  are  also 
to  be  considered.  The  assertion  has  been  made 
by  Schaffle,  Gustave  du  Puynode,  and  others  that 
the  increase  in  the  production  of  gold,  following 
upon  the  discovery  of  the  California  fields,  lowered 
the  rate  of  interest  in  Europe  and  stimulated 
speculation,  resulting  in  a  number  of  crises,  prom- 
inently that  of  1857.^  The  Committee  of  the 
House  of  Commons  appointed  to  inquire  into  the 
causes  of  the  crisis  of  1857  reported  that  specula- 
tion had  been  especially  increased  by  three  circum- 

'  For  a  discussion  of  this,  see  Schaffle's  article  in  "  Zeitschrift 
fur  d.  gesammte  Staatswissenschaft,"  Bd.  XIV,  1858,  pp.  469,  470, 
also  in  "Deutsche  Vierteljahrsschrift,"  1858,  Heft  I,  p.  327.  Puynode, 
in  "Journal  des  Economistes  "  for  March,  1858,  p.  458,  argues  the 
same  cause  for  the  crisis  of  1857  in  the  United  States.  For  a 
discussion  of  the  influence  of  the  scarcity  of  gold  and  demone- 
tization of  silver  upon  trade  since  1882,  see  Robert  Giffen's 
"Essays  in  Finance,"  2d  Series  (N.  Y.),  1886,  Essay  I:  "Trade 
Depression  and  Low  Prices,"  Part  IV;  "The  Question  of  Gold 
Scarcity,"  pp.  22-28.  Cf.  Dr.  Wm.  Scharling,  "Die  jetzige  Ge- 
schaftsstille  und  das  Gold,"  Conrad's  "  Jahrbuch,"  Bd.  II,  N.  F. ,  1885, 
pp.  189-219,  and  pp.  289-312;  also  J.  E.  T.  Rogers  in  "Prince- 
ton Review,"  Vol.  Ill,  N.  S.,  1879,  Article  "Causes  of  Commercial 
Depressions";  Stephen  Williamson,  "  Contemporary  Review,"  Vol. 
XXXV,  1879,  Article  "Bad  Trade  and  its  Cause,"  Part  I,  pp.  121- 

30 


INDUSTRIAL   EQUILIBRIUM 

stances  :  (i)  The  extension  of  foreign  trade  ;  (2)  A 
great  importation  of  gold  and  silver ;  (3)  The  econ- 
omies in  the  use  of  money  made  possible  by  the 
practice  of  banking. 

The  productive  process  may  be  considered 
relatively  stable  and  dependable,  in  comparison 
with  the  capricious  movements  of  demand.  The 
unexpected  in  industry  usually  makes  itself  felt 
first  from  the  side  of  demand.  We  do  not  suffi- 
ciently understand  the  process  by  which  wants  rise 
and  propagate  themselves  among  the  individuals 
composing  society ;  hence  there  is  to  us  always  an 
element  of  the  unexpected  in  the  movements  of 
demand.  There  occurs  to  the  mind  at  once  the 
influence  of  fashion.  Undoubtedly  the  word  "  fash- 
ion "  has  been  overworked  in  this  connection  and 
made  to  stand  for  a  variety  of  forces  governing 
the  movement  of  wants.  Undoubtedly  also  many 
producers  who  complain  loudly  of  the  uncertainty 
of  fashion  have  themselves  to  thank  for  nourish- 
ing a  change  of  demand  to  put  movement  into  the 
commodity  market.  A  review  of  modern  changes 
in  production  and  consumption  strongly  indicates 
that  these  two  complementary  parts  of  the  eco- 
nomic process  are  growing  more  and  more  unlike 
and  are  with  more  and  more  difficulty  adjusted  to 
one  another.  Production,  employing  machinery, 
and  a  strictly  classified  labor  personnel  under  a 
complete  system  of  organization  pours  forth  vast 
quantities  of  goods  of  which  each  unit  exactly 
resembles   the   other.     To    secure   the   economies 

31 


ECONOMIC   CRISES 

inherent  in  this  system  there  is  demanded  above 
all  things  stable  and  uniform  conditions  over  wide 
areas.  Demand  on  the  contrary,  influenced  by 
general  education  and  the  quickening  of  intellect- 
ual movements,  and  encouraged  to  nicety  by  the 
great  variety  of  goods  available  to  choose  from,  is 
becoming  more  uncertain  and  more  subject  to 
whims  and  fads  than  ever  before.  The  increase 
in  the  income  of  the  wage-earning  classes  increases 
their  power  and  desire  to  individualize  their  con- 
sumption. The  smaller  an  income  the  more  pre- 
dictable is  the  expenditure  resulting  from  it  as  it 
is  mortgaged  to  the  necessities  of  life.  The  larger 
the  income  the  larger  the  disposable  surplus  set 
free  to  form  an  unpredictable  demand. 

To  this  list  of  crisis-inducing  influences  may  be 
added  one  or  two  which  cannot  be  grouped  accord- 
ing to  the  customary  divisions  of  economics. 

It  is  a  fact,  known  to  every  one,  that  war  operates 
powerfully  to  restrain  certain  kinds  of  consump- 
tion and  to  increase  other  kinds.  The  "  Chicago 
Tribune"  of  December  31,  1898,  published  a  very 
interesting  table,  in  the  course  of  a  review  of  the 
industry  of  Chicago,  to  show  what  industries  were 
stimulated  by  the  Spanish  war,  what  were  depressed, 
and  what  unaffected.  In  the  first  class  are  placed 
industries  connected  with  drugs,  groceries,  farm 
produce,  grain,  flour,  iron  and  steel,  leather,  paper, 
packing  cases  and  clothing.  To  this  might  be 
added  the  newspaper  and  photographic  industries, 
the  trade  of  American  resorts  and  the  manufacture 

32 


INDUSTRIAL   EQUILIBRIUM 

of  powder,  bunting  and  flags,  brushes,  etc.  Among 
the  industries  depressed  were  those  connected  with 
boots  and  shoes,  real  estate,  building  material,  lum- 
ber, and  beer.  The  bicycle  industry  was  depressed 
and  trade  on  the  Board  of  Trade  was  lessened. 
The  industries  not  affected  were  connected  with 
coal,  furniture,  hardware,  jewellery,  and  millinery. 
Banking  was  also  unaffected.  Not  alone  does  war 
disturb  the  course  of  industry  of  those  nations 
engaged  in  it,  but  of  many  others  as  well.  Neutral 
powers  may  have  their  markets  destroyed,  or  their 
sources  of  raw  material  cut  off,  or  may  suffer  from 
necessary  changes  in  the  routes  of  commerce. 
Again,  neutral  powers  are  tempted  to  expand  their 
production  in  the  hope  of  gaining  a  stolen  march 
upon  their  competitors  temporarily  handicapped. 
The  first  great  crisis  of  the  nineteenth  century, 
that  of  1815  in  England,  was  caused  by  the  exag- 
gerated hopes  of  English  merchants  that  they 
would  be  able  to  control  the  continental  markets 
at  the  close  of  the  Napoleonic  wars.^  War  is  an 
abnormal  condition,  but  when  it  is  long  continued 
industry  adjusts  itself  in  a  measure  to  its  influence. 
The  passage  back  to  peace  may  then  be  a  readjust- 
ment accompanied  by  anxiety  and  distress,  until 
the  situation  of  trade  is  again  definite. 

The  delicately  poised  industry,  which  is  in  these 

8  Sir  Fr.  Baring  considered  the  unexpected  declaration  of  war 
to  be  one  of  the  chief  causes  of  the  crisis  of  1793.     "  Observations 
on  the  Bank  of  England,"  p.  19.     Tooke,  however,  disputed  this. 
"History  of  Prices,"  Vol.  I,  p.  177. 
D  33 


ECONOMIC    CRISES 

days  built  up  through  the  instrumentality  of  credit, 
may  suffer  derangement  through  the  failure  of  a 
staple  crop,  through  the  collapse  of  a  mining 
excitement,  or  in  the  puncture  of  the  bubble  of 
over-capitalization  of  joint  stock  concerns.  The 
whole  industry  of  a  country  may  suffer  in  a  de- 
rangement having  its  origin  and  cause  in  some 
one  trade.  It  has  even  been  maintained  that  in 
certain  critical  seasons  a  general  convulsion  has 
followed  as  the  result  of  the  disastrous  collapse  of 
some  one  great  individual  concern.  This  extreme 
statement  is  frequently  to  be  met  v/ith  in  the  litera- 
ture devoted  to  the  crisis  of  1857  i^i  the  United 
States.  That  crisis  is  attributed  by  some  to  the 
failure  of  the  Ohio  Life  Insurance  and  Trust  Com- 
pany, having  a  capital  of  ^2,000,000  and  a  deficit 
of  ;$20,ooo.  This  is,  of  course,  no  more  an  expla- 
nation of  the  crisis  of  1857  than  was  the  failure  of 
the  Cordage  Company  on  May  5,  1893,  the  cause 
of  the  crisis  of  1893. 

Such  an  enumeration  of  the  causes  of  crisis  as 
the  preceding,  while,  perhaps,  fair  enough  and  free 
from  partisan  bias,  and  while  elastic  and  compre- 
hensive, is  unsatisfying.  Roscher  has  been  justly 
praised  for  early  according  a  place  to  the  discus- 
sion of  crises.  His  writings  have  been  called  pre- 
eminently fair.  This  is  because  what  he  has  given 
us  is  virtually  a  blanket  theory  —  an  explanation 
encyclopaedic  rather  than  truly  interpretative.  An 
enumeration  similar  to  the  one  given  above  can 
afford  us  no  criterion  to  judge  the  future.    Accord- 

34 


INDUSTRIAL   EQUILIBRIUM 

ing  to  the  "  Equilibrium  "  theory,  the  cause  of  each 
crisis  is  some  unusual  conjecture  which  must  be 
sought  in  the  study  of  the  events  immediately  pre- 
ceding the  crisis.  The  recognition  of  the  delicacy 
of  the  industrial  adjustment  is  merely  an  indirect 
way  of  saying  that  the  precipitating  cause  of  a 
crisis  may  be  in  itself  something  inconsequential 
in  comparison  with  the  string  of  events  which  it 
sets  in  motion.  This  takes  the  matter  out  of  the 
general  into  the  particular,  and  hides  the  roots  of 
the  problem  in  accidental  and  personal  details 
beyond  the  reach  of  scientific  study.^  The  con- 
clusions to  be  drawn  from  this  are  that  the  causes 
of  crises  are  innumerable,  that  no  important  classi- 
fication can  be  made  among  them,  and  that  all 
true  causes  are  equally  important.^''  The  discus- 
sions contained  in  the  following  chapters  may  be 
considered  in  the  light  of  an  answer  to  this 
position. 

9  "  One  can  see  that  the  ultimate  cause  of  such  crises  must  be 
an  organic  failure,  and  that  the  source  from  which  the  repetition 
of  the  phenomenon  takes  its  rise  must  be  sharply  distinguished 
from  the  individual  circumstances  connected  with  each  crisis. 
It  is  obviously  a  superficial  procedure  to  fix  attention  on  the 
incidental  character  of  the  crisis  phenomenon,  and  therein  to 
find  the  real,  and  in  part  predictable,  law  without  coupling  with 
this  the  search  for  the  ultimate  causes  which  account  for  the 
entire  series  of  similar  phenomena."  —  E.  Duhring,  "  Cursus  der 
National-  und  Socialokonomie,"  pp.  236,  237. 

^•^  "  The  causes  of  such  an  economic  disease  are  most  numerous. 
Every  circumstance  which  suddenly  and  largely  increases  produc- 
tion or  decreases  consumption  or  which  even  disturbs  the  ordinary 
course  of  industry  must  bring  with  it  a  commercial  crisis."  — 
RosCHER,  "  Ansichten  der  Volkswirthschaft,"  Bd.  II,  Sec.  5,  p.  391. 

35 


ECONOMIC   CRISES 

Passing  to  the  consideration  of  the  remedies 
which  are  proposed  or  suggest  themselves  in  con- 
nection with  this  hst  of  causes,  we  have  to  observe 
that  they  must  of  necessity  be  as  numerous  and 
desultory  as  are  the  causes  which  they  are  to 
counteract.  Alleviative  rather  than  preventive 
measures  are  proposed  by  the  adherents  of  the 
"  Equilibrium  "  theory.  First,  as  regards  capital : 
During  a  financial  panic  persons  who,  in  ordinary 
times  would  be  perfectly  solvent,  are  liable  to 
have  their  property  swept  away,  at  a  merely  nomi- 
nal valuation,  in  order  to  purchase  cash  in  a  strin- 
gent money  market  with  which  to  pay  a  small 
obligation.  To  meet  this  emergency  the  state  may 
issue  a  paper  currency  which  may  either  draw 
interest,  or  be  taxed  to  secure  its  rapid  retirement 
after  it  has  served  its  purpose.  This  aid  may 
be  made  effective  by  advancing  money  to  private 
parties  upon  security  of  property  including  stocks 
of  goods."  The  trial  of  this  scheme  in  the  United 
States  in  1873  condemned  it  as  tending  to  revive 
speculation,  to  create  an  unhealthy  dependence 
upon  government,  and  as  offering  a  relief  from  the 
due  effects  of  unwise  and  dishonest  financiering. 

To  afford  an  equal  relief  to  labor  the  local  units 
of  government  may  give  employment  to  those  who 
are  out  of  work.  If  it  is  deemed  unwise  for  the 
state  to  affirm  the  "right  of  work,"  this  may  be 
done   under   the   plea  of   taking    advantage  of   a 

"  Roscher,  "Ansichten,"  Bd.  II,  Sec.  16,  B. 
36 


INDUSTRIAL   EQUILIBRIUM 

favorable  market.  In  behalf  of  such  public  expen- 
diture it  may  be  urged  that  persons  so  employed 
would  become  a  charge  upon  the  public  if  not 
aided  in  some  such  manner. 

Little  can  be  done  to  diminish  the  force  of  such 
reorganizing  influences  as  invention,  the  opening 
of  new  means  of  communication,  or  the  opening 
of  new  markets.  Nothing  short  of  a  comprehen- 
sive reorganization  of  industry  such  as  is  proposed 
by  the  socialists  would  avail  much.  The  same 
may  be  said  of  the  wars  of  trusts  and  monopolies. 
It  is  to  be  observed  that  legislation  to  restrict  trusts 
and  monopolies  has  been  ineffective  thus  far  in 
the  United  States.  In  regard  to  the  risks  con- 
nected with  changes  in  tariff  or  monetary  legisla- 
tion the  remedy  suggests  itself.  To  forecast,  and 
in  some  degree  diminish  the  uncertainties  of 
demand,  the  sovereign  remedy  is  statistical  in- 
quiry. It  is  a  remarkable  fact  that  almost  without 
exception  every  important  writer  upon  crises  has 
emphasized  in  the  most  unmistakable  manner 
the  necessity  of  enlarging  the  scope  of  govern- 
ment statistical  investigations. ^^  Statistical  bureaus 
should  not  only  undertake  investigations  on  their 
own  account,  but  should  give  the  utmost  publicity 
to  valuable  statistical  information  gathered'by  pri- 

12  Roscher  says :  "  Had  each  producer  and  tradesman  an  accu- 
rate and  continuous  knowledge  both  of  the  extent  of  demand  and 
of  the  number  and  capacity  of  his  competitors,  a  serious  crisis 
would  scarcely  be  possible."  —  "  System  der  Volkswirthschaft," 
Bd.  Ill,  Ch.  II,  Par.  175,  A. 

37 


ECONOMIC   CRISES 

vate  persons  and  trade  organizations  and  societies. 
If,  as  John  Stuart  Mill  said,  the  laws  of  consump- 
tion are  the  laws  of  human  enjoyment,  then  the 
process  of  consumption  cannot  be  extensively  regu- 
lated by  legislation  without  serious  loss  of  freedom 
and  enjoyment. ^^  The  next  best  thing  is  to  subject 
the  phenomena  of  consumption  to  serious  study  in 
order  that  we  may  at  least  foresee,  if  we  cannot 
control  events.  In  this  connection  it  may  be  per- 
missible to  add  a  brief  explanation  of  the  plans 
for  the  statistical  study  of  consumption  proposed 
by  the  late  Dr.  Ernst  Engel,  of  Berlin,  formerly 
the  Chief  of  the  Prussian  Statistical  Bureau.  This 
eminent  statistician  proposed,  through  the  study 
of  budgets  of  private  expenditure,  to  discover  the 
laws  of  consumption.  If  changes  in  demand  can 
be  foreseen,  it  will  greatly  facilitate  the  adjustment 
of  supply  to  demand.  Dr.  Engel  himself  exam- 
ined the  expenditures  of  thousands  of  Prussian 
families  and  formulated  the  following  four  propo- 
sitions :  "  First.  That  the  greater  the  income, 
the  smaller  the  relative  percentage  of  outlay  for 
subsistence.  Second.  That  the  percentage  of  out- 
lay for  clothing  is  approximately  the  same,  what- 
ever the  income.     Third.     That  the  percentage  of 

18  <<  j\  systematic  direction  of  production  without  freedom  of 
demand  and  freedom  in  the  choice  of  occupations  would  be, 
while  not  precisely  unthinkable,  accompanied  by  the  destruction 
of  civilization  and  all  that  which  makes  life  worth  living.  To 
harmonize  the  systematic  direction  of  all  industry  with  freedom 
of  demand  and  of  the  choice  of  occupation  is  a  problem  which 
can  only  be  compared  with  the  squaring  of  the  circle." 

38 


INDUSTRIAL   EQUILIBRIUM 

outlay  for  lodging,  or  rent,  and  for  fuel  and  light, 
is  invariably  the  same,  whatever  the  income. 
Fourth.  That  as  the  income  increases  in  amount, 
the  percentage  of  outlay  for  sundries  becomes 
greater."  ^^  Few  subjects  of  economic  research 
appear  to  offer  greater  rewards  to  the  student 
than  does  this  one. 


RESUME 

L    Economic    equilibrium  —  static    conception  —  dynamic 

conception. 
II.    Grand  divisions  of  crisis  theories. 

1.  A   stable   equilibrium   disturbed   by  unpredictable 

causes. 

2.  An   unstable    equilibrium   eventually   ruptured    by 

steadily  operating  cumulative  forces. 

III.  School  adhering  to  the  first  class  of  theories  —  Roscher. 

IV.  Sensitiveness  of  modern  industry  to  disturbances  caused 

by  {a)  division  of  labor,  (J))  lengthening  of 
economic  forecasts,  {c)  use  of  credit  (special 
case  of  unsound  banks  and  unregulated 
paper  currency),  {d)  foreign  trade,  {e)  in- 
crease of  elaborative  as  opposed  to  extrac- 
tive industries. 
V.  Unpredictable  causes  of  crises  grouped  according  to  the 
departments  of  economic  science. 
I.    Production. 

(fl)  Inventions  —  destruction  of  invested  capital. 

(J))  New  means  of  communication  —  new  markets 
misjudged  —  exploitation  of  new  markets 
—  of  the  tropics, 

1*  "  Report  of  Massachusetts  Bureau  of  Statistics  of  Labor,"  1885, 
p.  152. 

39 


ECONOMIC   CRISES 

(c)  Changes  in  tariffs. 

(d)  Monopolies  —  trust  wars. 

2.  Exchange. 

(e)  Course  of  the  precious  metals  —  monetary 

legislation. 

3.  Consumption. 

(/)  Changes  of  fashion  —  divergence  in  the  ten- 
dencies governing  production  and  those 
governing  consumption. 
VI.    Miscellaneous  causes. 

(£■)  War  —  effect  upon  different  industries. 
(/^)  Crop  failures. 

(/■)    Failure  of  a  single  great  business  concern. 
VII.    Unsatisfactory  character  of  such  an  enumeration  of 

causes. 
VIII.    Remedies  —  alleviative  rather  than  preventative. 

(a)  For  capital  —  temporary  issue  of  paper  currency. 
(<^)  For  labor  —  employment  on  public  works. 

(c)  Legislation  affecting  commerce. 

(d)  Statistical  information  to  adjust  supply  to  de- 

mand.    Engel's  plan  —  his  four  laws  of 
budgets. 


40 


CHAPTER   III 

CRISES   AND   THE   ORGANIZATION   OF   INDUSTRY 

As  crises  are  evidences  of  a  lack  of  adjustment 
between  economic  forces,  they  naturally  suggest 
the  question,  Who  are  the  men  whose  business  it 
is  to  direct  industry,  and  with  what  equipments 
are  they  provided  for  the  discharge  of  their  duties  ? 
Inquiry  as  to  the  character  of  the  machinery  which 
controls  the  larger  movements  of  industry  reveals 
one  of  the  serious  weaknesses  of  the  present  eco- 
nomic order.  While  the  organization  and  control 
of  the  internal  affairs  of  business  units  have  been 
well  looked  after,  there  have  been  developed  as 
yet  few  efficient  means  of  facilitating  the  coordina- 
tion of  the  activities  of  the  various  economic  units 
according  to  a  general  and  sufficient  plan.  There 
is  a  lack  of  means  for  supplying  information  as  to 
the  general  present  and  future  conditions  of  the 
market,  and  for  subordinating  individual  producers 
to  the  dictates  of  a  comprehensive  and  rational 
policy. 

The  changes  which  took  place  during  the  "  Indus- 
trial Revolution"  were  primarily  changes  in  the 
technical  processes  of  manufacture.  In  order  to 
accommodate  these  new  processes  many  changes 

41 


ECONOMIC   CRISES 

have  been  rendered  necessary  in  the  organization 
of  the  factors  of  production.  The  proportion  of 
capital  employed  has  been  increased.  The  intro- 
duction of  machinery  has  necessitated  elaborate 
structures  and  the  use  of  steam  power.  The  work- 
shop and  the  tools  have  grown  into  a  factory. 

The  division  of  labor  has  been  greatly  furthered, 
and  this  has  necessitated  the  gathering  of  work- 
men into  great  communities  where  all  depend  upon 
the  turning  of  the  same  chance  of  the  markets. 
This  concentration  of  productive  forces  means  an 
extension  of  the  market.  The  evolution  which  has 
drawn  men  together  as  producers  has  separated 
producers  from  their  markets  both  by  distance, 
time,  and  general  social  and  economic  relations.^ 
Under  these  conditions,  when  an  industry  is 
depressed  it  means  a  concentration  of  suffering 
in  a  few  localities.  The  difficulty  of  bringing 
together  a  body  of  expert  workmen  and  the  diffi- 
culty of  providing  for  them  if  discharged  en  masse 

1  John  A.  Hobson  says  of  the  effects  of  machinery :  "  Again 
the  growth  of  machinery  makes  industry  more  intricate.  Manu- 
facturers no  longer  produce  for  a  small  known  market,  the  fluctua- 
tions of  which  are  slight  and  easily  calculable.  The  element  of 
speculation  enters  into  manufacture  at  every  pore,  —  size  of  mar- 
ket, competitors,  and  price  are  all  unknown.  Machinery  works 
at  random  like  the  blind  giant  it  is.  Every  improvement  in  com- 
munication and  each  application  of  labour-saving  invention  adds 
to  the  delicacy  and  difficulty  of  trade  calculations.  Hence  in  the 
productive  force  of  machinery,  we  see  the  material  cause  of  the 
violent  oscillations,  the  quiver  of  which  never  has  time  to  pass 
out  of  modern  trade."  —  "Problems  of  Poverty,"  London,  1891, 
P-  34- 

42 


THE    ORGANIZATION    OF    INDUSTRY 

are  circumstances  leading  employers  to  continue 
operations  when  the  conditions  of  the  market  are 
unfavorable.^  Large  capital  also  calls  for  continu- 
ous use  regardless  of  the  fluctuations  of  demand. 

The  length  of  the  productive  process  has  been 
increased,  if  not  in  time,  at  least  as  regards  the 
number  of  hands  to  which  the  various  parts  are 
intrusted,  A  cause  of  misunderstanding  is  thus 
introduced.  The  division  of  functions  is  so  great 
that  even  makers  of  complementary  goods  and 
parts  of  composite  products  lose  sight  of  one 
another.  As  the  sphere  of  the  operations  of  each 
unit  is  narrowed  the  difficulty  of  keeping  informed 
as  to  the  whole  process  and  of  regulating  one's 
activities  accordingly  is  increased. 

Changes  in  demand  of  no  less  momentous  char- 
acter have  taken  place.  It  is  true  that  the  market 
open  to  any  single  producer  is  now  geographically 
much  wider  than  ever  before,  but  every  part  of 
this  field  is  now  operated  upon  by  causes  tending 
to  produce  uncertainty  such  as  the  producer  for  a 
local  market  formerly  never  experienced.  The 
character  of  our  culture,  which  has  emphasized 
freedom  and  individuality,  has  made  the  economic 
conduct  of  the  buyer  difficult  to  predict.^     Custom 

2  Herkner,  "  Die  Ober-Elsassische  BaumwoUindustrie,"  Strass- 
burg,  1887,  P-  257. 

2  Fashion,  by  laying  emphasis  upon  artistic  qualities  of  goods 
and  by  demanding  ever  new  forms,  prevents,  in  some  degree,  the 
application  of  the  methods  of  the  factory  system  to  the  produc- 
tion of  these  goods.  In  so  far  as  this  is  true  and  as  fashion 
demands  personal  services  and  hand-made  goods,  its  changes  do 

43 


ECONOMIC   CRISES 

formerly  marked  clearly  defined  limits  within  which 
prediction  was  possible.  As  customs  have  lost 
their  force,  these  scanty  rules  have  slipped  from 
the  hands  of  an  anxious  trade  to  be  replaced  by  no 
equally  adequate  means  of  reading  the  markets. 
The  city  or  district  market  once  held  by  the  local 
merchant  or  guild  has  now  become  commercially 
fluid  and  mobile  and  responds  to  the  influence  of 
causes  as  various  and  remote  as  the  circumstances 
of  production  the  world  over. 

The  movement  of  the  masses  out  of  ancient  and 
established  conditions  into  new  industry  and  intelli- 
gence has  given  to  our  age  the  characteristics  of  a 
transitional  period  in  which  economic  forecasts 
share  the  uncertainty  of  political  and  social  pre- 
diction. The  growth  of  means  of  communication, 
and  the  removal  of  barriers  to  trade,  stimulate  a 
rapid  change  of  ideas  and  economic  wants.  The 
growth  of  city  life  increases  the  variabiUty  of  con- 
sumption, for  changes  in  the  taste  of  city  people 
are  rapid,  and  the  power  of  choosing  substitutes  in 
consumption  is  greatest  in  cities.  One  concomi- 
tant of  a  quickened  social  intercourse  is  the  growth 
of  the  power  of  fashion.     A  more  rapid  change  of 

not  fall  upon  the  machine  industry.  As  the  root  idea  of  fashion 
is  to  express  superiority  or  exclusiveness  of  social  standing 
through  the  possession  of  objects  or  manners  not  possessed  by 
others,  fashion  frequently  discriminates  against  machine-made 
goods  because  of  the  abundance  and  similarity  of  the  product. 
An  article  is  likely  to  be  dropped  from  the  list  of  those  used  to 
express  social  standing  when  it  has  been  once  firmly  seized  upon 
by  machine  industry. 

44 


THE   ORGANIZATION    OF   INDUSTRY 

fashions  takes  place  as  the  competition  for  social 
preeminence  is  increased. 

The  relations  which  foreign  and  domestic  de- 
mand sustain  to  one  another  may,  under  certain 
conditions,  be  the  cause  of  a  peculiar  and  recur- 
rent disturbance  of  trade.  A  country  which  has 
been  suffering  from  depression,  if  its  merchants 
are  enterprising,  may  build  up  a  foreign  trade, 
depending  upon  the  attractive  power  of  the  low 
prices  offered.  Upon  the  recovery  of  local  demand 
a  period  of  intense  activity  may  follow,  during  which 
the  foreign  demand  persists  and  the  newly  awak- 
ened home  demand  is  added  to  it.  This  home  de- 
mand, if  business  prospects  are  fair,  is  likely  to  be 
abnormal,  since  stocks  which  have  been  kept  low 
and  equipment  which  has  been  allowed  to  wear 
out  must  now  be  replaced. 

The  abnormal  demand  brings  about  a  rise  in 
prices.  In  order  to  satisfy  the  home  demand,  and 
since  foreign  trade  can  no  longer  be  attracted  by 
low  prices,  the  latter  is  neglected  and  falls  off. 
Subsequently,  when  the  home  demand  is  reduced 
to  normal  proportions,  a  surplus  of  unsold  products 
begins  to  emerge  which  seeks  a  foreign  outlet. 
But  since  foreign  trade  is  only  slowly  built  up  and 
since  it  has  been  neglected,  this  channel  does  not 
offer  a  ready  outlet  to  producers.  The  consequence 
is  over-production  which  brings  on  a  depression. 
This  cycle  of  foreign  trade  may  repeat  itself  again 
and  again.  It  is  this  sort  of  danger  coupled  with 
the    danger    of    overcapitalized    industries   which 

45 


ECONOMIC   CRISES 

threatens     the     United    States     at    the    present 
time. 

The  localization  of  industry  requires  an  extensive 
machinery  to  spread  products  evenly  over  the  area 
of  consumption.  Between  the  producer  and  the 
consumer  an  immense  amount  of  complicated 
machinery  has  been  erected  so  that  it  is  difhcult, 
if  not  impossible,  for  them  to  trace  each  other's 
movements.  The  relation  between  the  two  has 
become  an  impersonal  one  hard  to  forecast  before 
the  actual  cash  nexus  is  formed.  In  this  respect 
it  little  resembles  the  direct  relations  which  were 
once  maintained  between  the  village  shoemaker 
and  his  neighbors,  who  were  at  once  his  patrons 
and  friends.  The  growth  of  means  of  transporta- 
tion has  accustomed  the  producer  to  look  to  a  dis- 
tance for  his  market,  and  the  consumer*  to  hold  in 
equal  esteem  supplies  coming  from  any  quarter 
or  any  distance.  Modern  credit  and  facilities  of 
exchange  permit  the  most  lively  interchange  of 
influences  between  all  parts  of  the  economic  field. 
Upon  so  large  a  field  no  producer  can  single- 
handed  compass  the  problem  of  understanding 
the  market.  The  number  of  the  competitors  is 
unknown,  and  so  is  their  producing  power.  The 
changes  of  the  market  are  more  or  less  of  a  riddle. 
Calculations    based    upon  the  conditions  at  home 

*  G.  Schmoller  attributes  "  the  size  and  the  increase  of  our 
crises  chiefly  to  the  astonishing  growth  of  commercial  transactions 
now  carried  on  with  all  parts  of  the  world."  — "  Jahrbuch  fiir 
Gesetzgebung,"  Jahrgang  1886,  p.  601. 

46 


THE   ORGANIZATION    OF   INDUSTRY 

may  be  upset  by  a  failure  of  Russian  harvests, 
by  a  revolution  in  South  America  or  legislative 
changes  in  Europe,  by  an  invention  or  trust  in 
the  United  States  or  a  subsidized  industry  in 
Canada. 

The  result  is  that  the  problem  of  determining 
the  nature  and  extent  of  demand  is  an  extremely 
difficult  one  for  the  individual  producer  even  when 
equipped  with  long  experience  and  the  best  avail- 
able means  of  information.  So  it  has  been  held 
that  while  these  changes  have  been  taking  place 
in  production  and  in  demand  and  in  the  range  and 
nature  of  competition  an  adequate  change  has  not 
taken  place  in  the  methods  and  institutions  used^ 
to  study  the  nature  of  industry  and  to  direct  the 
organization  of  industrial  forces.  The  productive 
power  of  industry  has  in  a  half  century  been  as- 
tonishingly increased,  but  it  is  claimed  that  the  dis- 
tribution of  this  power,  considering  the  industrial 
problem  as  a  whole,  has  been  relatively  planless 
because  an  equal  advance  has  not  been  made 
in  methods  of  organization  and  control.  Private 
individualistic  control  is  the  rule  for  much  of 
productive  property.  Capital  and  the  division 
of  labor  which  have  accomplished  so  much  in 
increasing  production  have  not  been  sufficiently 
apphed  to  the  solution  of  the  problem  of  the  mar- 
ket. In  short,  the  machinery  of  management  has 
not  developed  pari  passu  with  the  technique  of 
production.  The  chief  obstacle  which  prevents 
the  growth  of  comprehensive  governing  agencies 

47 


ECONOMIC   CRISES 

is  the  fact  that  production  is  carried  on  for  private 
gain.  The  presence  of  individual  interests  pre- 
vents certain  very  desirable  forms  of  cooperative 
action.  Exceptional  abihty  to  comprehend  the 
workings  of  industry  is  guarded  for  private  use 
so  that  it  may  contribute  to  private  gain.  So  also 
information  which  would  be  of  the  utmost  advan- 
tage to  trade  as  a  whole,  if  made  public,  is  guarded 
in  secrecy  to  serve  as  a  source  of  private  gain. 
Production  takes  place  where,  when,  and  in  the 
measure  that  individual  organizers  and  capitalists 
believe  it  will  result  in  profit  to  themselves.  Such 
production  must  inevitably  be  irregular,  slow  to 
,  adapt  itself  to  social  needs,  and  inadequate  to  sat- 
isfy many  legitimate  desires.  Private  enterprise 
will  not  take  hold  of  economic  problems,  no  matter 
how  desirable  their  solution  may  be  to  society, 
unless  a  resultant  private  gain  can  be  distinctly 
seen.  But  private  self-interest  puts  more  than 
negative  difficulties  in  the  way,  for  it  frequently 
begets  endeavors  to  produce  abnormal  and  artifi- 
cial relations  between  demand  and  supply  in  order 
to  secure  ratios  of  exchange  which  are  profitable 
to  the  private  interests  concerned. 

In  spite  of  the  splendor  of  isolated  achievements 
in  the  construction  of  great  businesses,  there  is 
some  ground  for  saying  that  the  lack  of  a  well- 
coordinated  system  of  control  makes  industry  re- 
semble, at  present,  a  mob  rather  than  an  army. 
Indeed,  the  headlong  passion  of  the  mob  in  which 
each  stimulates  the  other,  and  because  there  is  no 

48 


THE   ORGANIZATION    OF   INDUSTRY 

plan  things  are  overdone,  resembles  somewhat  the 
stress  of  competition  which  when  unrestrained 
ends  in  over-production. 

Individualistic  production  for  a  market  which 
cannot  be  understood  without  the  cooperation  of 
extensive  agencies  cannot  result  otherwise  than  in 
confusion.  Such  conditions  always  favor  concen- 
tration and  tend  to  work  out  their  own  cure  through 
the  one-man  system.  The  climax  of  uncertainty  is 
war ;  hence  the  significance  of  such  war  terms  as 
"  captains  of  industry "  used  in  business.  But 
business  must  go  on,  and  when  accurate  informa- 
tion fails,  speculative  estimates  take  its  place,  and 
the  optimism  which  is  a  mental  trait  of  vigorous 
natures  leads  the  producer  to  forge  blindly  ahead 
at  full  speed,  attending  only  to  hear  the  crash  of 
some  less  fortunate  rival's  business.  Our  present 
solidarity  is  such  that  if  one  firm  increases  its  out- 
put, others  must  do  the  same  to  secure  equal  econ- 
omies in  production  and  avoid  being  edged  out  of 
the  market.^  The  result  of  such  a  system,  or 
rather  lack  of  system,  is  misdirected  production. 
When  this  is  sufficiently  serious  it  impairs  credit 
and  brings  about  total  derangement  of  the  market 
in  the  form  of  the  crisis. 

If  it  is  individual  self-interest  which  prevents 
such  an  organization  of  industry  as  would  prevent 
crises,  we  have  evidence  that  self-interest  may 
defeat  its  own  purposes.  As  Dr.  Leete  says  in 
Edward  Bellamy's  "  Looking  Backward,"  "  I  sup- 

^  Wasserrab,  "Preise  und  Krisen,"  p.  65. 
E  49 


ECONOMIC   CRISES 

pose  that  no  reflection  would  have  cut  the  men  of 
your  wealth-worshipping  century  more  keenly  than 
the  suggestion  that  they  did  not  know  how  to  make 
money.  .  .  .  Selfishness  was  their  only  science, 
and,  in  industrial  production,  selfishness  is  suicide." 
The  problem  of  the  employment  of  capital,  which 
will  be  taken  up  in  the  next  chapter,  is  closely  con- 
nected with  this  matter  of  the  managerial  ability 
displayed  in  industry.  So  far  as  there  is  at  the 
present  time  any  problem  of  oversaving,  it  is  only 
superficially  viewed  as  a  misadjustment  of  final 
consumption  to  the  productivity  of  industry.  It  is 
really  an  indication  of  the  lack  of  organizing  abil- 
ity because  of  which  wages  and  interest  are  low 
and  profits  high  while  industry  fails  to  keep  pace 
with  the  growth  of  new  wants. 

In  as  far  as  the  line  of  argument  which  has  been 
here  followed  is  valid,  the  crisis  is  merely  one  of 
many  symptoms  of  a  lack  of  plan  and  organized 
effort  in  the  management  of  productive  forces.  It 
has  been  claimed  that  the  business  field  and  the 
amount  and  complexity  of  business  transactions 
have  increased  much  more  rapidly  than  the  size 
and  power  of  the  individual  business  unit.  The 
result  is  that  each  unit  is  less  able  than  before  to 
control  the  conditions  affecting  it.  But  it  may 
also  be  asserted  that  the  producing  power  of  the 
business  unit  has  increased  more  rapidly  than  its 
orienting  and  directing  power. 

To  provide  the  necessary  organization,  it  is  de- 
sirable that  there  should  be  a  movement  both  from 

50 


THE   ORGANIZATION    OF    INDUSTRY 

the  side  of  private  and  public  initiative.  There 
are  forces  in  operation  at  present  tending  to  se- 
cure greater  dependability  of  economic  conditions. 
We  have  already  spoken  of  the  demand  for  uni- 
formity made  by  the  modern  system  of  production. 
A  large  investment  of  capital  makes  the  continu- 
ous exploitation  of  a  business  a  prime  factor  in 
securing  economy  of  production.  So  with  the 
skill  expended  in  securing  a  competent  body  of 
workmen,  and  in  perfecting  plans  of  operation. 
As  the  amount  of  capital  and  brains  necessary  to 
set  a  business  "  on  its  feet "  increases,  the  crisis 
will  obviously  lay  a  greater  burden  of  loss  upon 
the  capitalist  and  manager,  and  a  less  proportional 
loss  upon  labor.  Forces  are  thus  set  in  motion  to 
secure  uniformity.  The  chief  direction  in  which 
these  forces  have  thus  far  exhibited  themselves  has 
been  in  the  elimination  of  competition  by  the  forma- 
tion of  trusts  and  monopolies.^  But  there  are  other 
lines  in  which  they  might  operate  with  equal  effi- 
ciency and  intelligence. 

Whatever  increases  the  size  of  business  units  by 
reducing  the  number  of  independent  unknown  ele- 
ments in  the  business  situation  simplifies  the  prob- 
lem.    As  Hon.  Carroll  D.  Wright  of  the  United 

6  Stieda,  "  Die  deutsche  Hausindustrie,"  Abschnitt  II,  Par.  19; 
"Die  Krisen  und  die  Hausindustrie,"  pp.  104,  105;  also  Moritz 
Mohl,  "  Ueber  die  Wiirttembergische  Gewerbsindustrie,"  Stutt- 
gart, 1828,  p.  408.  Note  the  railway  consolidation  in  England 
following  the  crisis  of  1847,  ^""^  the  pooling  and  consolidation 
in  the  United  States  after  1873,  and  the  rapid  formation  of  trusts 
during  1898  and  1899  in  the  United  States. 

51 


ECONOMIC   CRISES 

States  Department  of  Labor  says  in  his  report  on 
Industrial  Depressions,  "  If  the  employers  in  any 
industry  would  combine  under  an  organization  that 
should  have  positive  coherence,  there  would  be  no 
difficulty,  so  far  as  that  industry  is  concerned,  in 
regulating  the  volume  of  production  in  accordance 
with  the  demand."  It  may  very  well  be,  however, 
that  a  means  of  solving  a  difficulty  may  not  be  com- 
mendable because  it  creates  greater  difficulties  than 
it  adjusts ;  and  this  is  true  of  a  part  of  the  present 
movement  toward  monopoly. 

The  time  once  was  when  the  ownership  and 
control  of  property  were  largely  coincident.  We 
have  been  gradually,  and  for  the  most  part  uncon- 
sciously, growing  away  from  those  conditions  in 
our  endeavor  to  secure  the  economies  of  modern 
production,  and  at  the  same  time  retain  the  institu- 
tion of  private  property  unchanged.  So  long  as 
the  ownership  and  the  control  of  property  are 
closely  connected,  the  utmost  tendency  toward 
consolidation  in  either  of  them  will  fix  the  meas- 
ure of  its  realization  in  the  other.  The  tendencies 
now  observable  to  separate  ownership  and  control 
may  provide  a  means  of  superior  business  organi- 
zation without  sacrificing  any  fundamental  princi- 
ple of  our  industrial  order. 

The  growth  of  monopolies  will  become  increas- 
ingly difficult  as  the  sphere  brought  under  their 
control  increases,  because  of  the  pressure  of  free 
capital  to  find  investment.  This  can  only  be 
avoided  by  freely  receiving  into  the  trust,  or  mo- 

52 


THE   ORGANIZATION   OF    INDUSTRY 

nopoly,  all  new  capital  on  equal  terms,  thus 
making  of  these  institutions  general  agencies  of 
industrial  control,  and  dissociating  them  with 
any  idea  of  favoritism  to  a  few.  Unless  this  is 
done  the  sensitiveness  of  the  pubhc  with  regard  to 
the  exercise  of  monopoly  power  may  be  expected 
to  increase.  But  along  these  lines  the  problem  of 
the  world  market  can  be  solved  by  nothing  less 
than  a  world  monopoly. 

It  is  possible  to  effect  a  closer  adjustment  of  the 
vital  parts  of  the  industrial  mechanism  by  the 
elimination  of  unnecessary  middlemen.  This  will 
bring  the  producer  and  consumer  into  more  direct 
relations  and  will  facilitate  mutual  adjustments. 
The  concentration  of  wholesaling,  jobbing,  and 
retailing  in  large  houses  would  promote  stability, 
because  small  and  local  fluctuations  are,  in  the 
hands  of  large  concerns,  made  to  neutralize  one 
another. 

Stock  exchanges  and  boards  of  trade  and  ex- 
changes of  a  similar  character  for  specific  Unes 
of  trade  may  render  exceedingly  valuable  service 
by  subjecting  certain  kinds  of  property  to  a  pro- 
cess of  continual  valuation.  Through  these  valua- 
tions there  is  expressed  the  conclusions  of  the 
combined  wisdom  of  the  investing  public  as  to 
the  position  and  prospects  of  any  business,  or  the 
wisdom  of  any  policy  known  to  be  adopted  by  its 
managers.  The  high  character  of  the  social  ser- 
vice which  such  investors'  organizations  may  per- 
form should  promote   an    ambition    leading   to   a 

53 


ECONOMIC   CRISES 

jealous  exclusion  of  all  practices  likely  to  further 
spurious  or  unwise  investments. 

Likewise  to  further  the  bringing  of  industry  to 
an  intelligent  knowledge  of  itself,  all  organizations 
such  as  commercial  agencies  for  the  collection  of 
information  are  to  be  encouraged.  It  is  of  the 
utmost  importance  that  this  information  should 
be  handled  in  the  most  honorable  and  unpreju- 
diced manner.  More  trade  papers  are  needed  and 
more  editors  with  training  in  economics.  The 
public  should  be  educated  to  appreciate  statistics 
of  production,  of  producing  capacity,  of  visible 
supply,  commerce,  price,  etc.,  and  to  demand  care- 
fully prepared  market  letters  as  a  part  of  general 
news.  In  the  collection  of  commercial  statistics 
the  cooperation  of  the  state  with  private  industry 
may  be  most  valuable.  The  state,  because  of  its 
extent  and  coercive  power,  can  collect  much  infor- 
mation regarding  both  external  and  internal  trade 
not  otherwise  obtainable.  For  the  same  reason 
that  the  work  of  the  Signal  Service  of  the  Weather 
Bureau  is  commended,  it  is  desirable  that  there 
should  be  established  a  competent  commercial  sig- 
nal service.'^  By  the  use  of  this  information  it  will 
be  possible  to  express  with  definiteness  what  is 
meant  by  average  and  normal  conditions  and, 
perhaps,  also  to  define,  and  detect  at  an  early 
date  in  their  appearance,  the  practices  and  con- 

■^  See  E.  de  Laveleye,  "  La  Marche  Monetaire  et  ses  crises 
depuis  cinquante  Ans,"  Ch.  I,  pp.  7,  8;  Thun,  "Die  Industrie  am 
Niederrhein,"  Bd.  I,  p.  140  ff. 

54 


THE   ORGANIZATION    OF   INDUSTRY 

ditions  which  lead  to  a  crisis.  It  is  possible  that 
an  extension  of  insurance  might  be  made  to  serve 
as  the  basis  for  the  better  organization  of  produc- 
tive forces.  Any  proposed  scheme  for  the  insur- 
ance of  business  profits  ^  will,  however,  necessarily 
meet  the  same  sort  of  difficulties  that  beset  insur- 
ance against  the  loss  of  work.  Distress  such  as 
that  through  which  the  United  States  has  recently 
passed  may  well  encourage  the  formation  of  reserve 
funds  in  public  as  well  as  private  treasuries  to  serve 
as  a  sort  of  informal  insurance  against  times  of 
crisis.  The  lines  of  insurance  which  are  already 
organized  on  business  principles  have  in  their 
records  accumulated  valuable  information  concern- 
ing economic  laws.  More  of  this  kind  of  informa- 
tion is  sorely  needed.  It  would  seem  as  if  a  more 
liberal  policy  in  regard  to  expenditures  designed 
to  establish  and  preserve  prosperity  might  be  fol- 
lowed quite  generally  by  business  enterprises,  and 
a  greater  publicity  be  given  to  valuable  business 


*  Wachtel,  the  author  of  a  work  entitled,  "  Die  Versicherung 
der  Actienrente,"  has  proposed  a  plan  for  the  universal  insurance 
of  business  profits,  which  he  believes  will  prevent  crises.  For 
those  businesses  in  which  it  is  possible  to  calculate  an  average 
return  upon  invested  capital,  he  would  establish  by  law  a  certain 
minimum  of  dividends  which  must  be  paid  within  certain  periods, 
—  say  of  ten  years  each.  The  concern  doing  business  at  a  loss  or 
at  small  profit  would  be  forced  out  of  existence,  and  great  care 
would  be  taken  in  the  establishment  of  new  business.  The  risk 
for  those  concerns  willing  to  guarantee  minimum  dividends  would 
be  assumed  by  insurance  companies  voluntarily  formed  for  that 
purpose. 

55 


ECONOMIC   CRISES 

records.  But  if  private  enterprise  cannot  be  en- 
listed in  securing  and  disseminating  the  informa- 
tion which  is  needed  to  keep  business  in  proper 
proportions,  the  state  must  be  called  upon  to 
undertake  the  duty. 


RESUME 

I.    One  cause  of  crises  is  the  lack  of  organs  of  industrial 
control  to  properly  coordinate  production 
with   consumption. 
II.    Statement   of  the   problem. 

A.  Certain    changes    have    been    brought    about   by 

modern  industrial  evolution. 

(a)  Division  of  labor  causes  territorial  speciali- 
zation. 

(^)  Large  masses  of  capital  call  for  continuous 
exploitation. 

(c)  Time  required  for  a  complete  economic 
process  lengthened. 

(</)  Specialization  making  oversight  of  the  mar- 
ket difficult. 

{e)  The  widened  market  is  subject  to  disturb- 
ance from  many  causes. 

(/")  Freedom  and  individuality  of  buyer  makes 
demand  uncertain,  custom  weakened. 

(^)  Development  of  wholesale  and  retail  agen- 
cies hides  producers  and  consumers  from 
one  another. 

B.  The  corresponding  evolution  of  means  of  control 

which  should   have  taken  place  has  been 
retarded    by   the    competition   of   private 
interests. 
(a)    Ability  and  knowledge  are  reserved  for  pri- 
vate use. 

S6 


THE   ORGANIZATION   OF   INDUSTRY 

(l>)     Production  is  for  gain  only. 

(c)  The   solution  of  economic    problems  is  not 

provided  for  by  a  system  based  on  com- 
petition. 

(d)  The  lack  of  cooperation  which   causes   the 

crisis  makes  industry  resemble  a  mob. 
C.  Result,  (i)  The  market  has  grown  more  rapidly 
than  individual  business  units  have  in- 
creased in  size.  (2)  Business  units  have 
increased  in  productive  power  more  than 
in  ability  to  judge  the  market. 
III.    Remedies. 

1.  Monopoly. 

(a)  Competition  when  coupled  with  large  capital 
which  demands  continuous  exploitation 
and  elaborate  plans  and  a  chosen  body 
of  workmen  not  to  be  abandoned  leads 
toward  monopoly. 

(i)  This  movement  objectionable  unless  owner- 
ship and  management  are  severed  more 
than  at  present  so  that  large  capitalistic 
organizations  become  managerial  agencies 
for  small  stockholders  rather  than  agencies 
for  promoting  the  interests  of  a  few. 

2.  Elimination  of  middlemen. 

3.  Increase  of  organizations  of  control  and  for  spread- 

ing information  such  as  stock  exchanges, 
boards  of  trade,  commercial  agencies,  and 
trade  papers.  Demand  for  better  official 
and  private  statistics. 


57 


CHAPTER   IV 

CRISES   AND  THE   PROBLEM   OF   CAPITAL 

The  nineteenth  century  is  one  which  has  wit- 
nessed an  unparalleled  development  of  the  material 
equipment  used  to  assist  man  in  the  production  of 
wealth.  It  is  necessary,  therefore,  in  searching 
for  the  cause  of  crises,  to  examine  into  the  relation 
between  the  accumulation  and  use  of  capital. 

Considerable  attention  has  been  devoted,  by 
English  writers  on  political  economy,  to  certain 
tendencies  at  work  in  a  progressive  community,  to 
change  the  proportion  in  which  the  three  factors, 
land,  labor,  and  capital,  unite  in  production.  The 
effect  of  the  "  Industrial  Revolution  "  has  been  to 
vastly  increase  the  amount  of  capital  which  can  be 
combined  with  a  given  amount  of  labor  and  land. 
Profits  or  the  returns  on  capital  are  fixed  by 
the  relation  of  demand  and  supply.  It  has  been 
long  observed  that  in  certain  progressive  countries 
the  rate  of  profit  continually  tends  to  decHne. 
Adam  Smith  ^  believed  that  the  desires  leading  to 
the  accumulation  of  capital,  and  the  competition 
of  capitalists  among  themselves  to  find  employ- 
ment  for   their  means,   were  sufficient  causes  to 

1  "  V/ealth  of  Nations,"  Bk.  II,  Ch.  IV. 
58 


THE   PROBLEM   OF   CAPITAL 

account  for  the  decline  of  profits.  To  this  expla- 
nation a  very  important  addition  was  made  by 
Ricardo.  To  understand  what  this  was,  it  will 
be  necessary  to  refer  to  the  law  of  diminishing 
returns. 

The  price  of  food  was  exorbitantly  high  in  Eng- 
land at  the  opening  of  the  nineteenth  century. 
Among  the  causes  of  this  were  the  war  with 
France,  a  succession  of  bad  harvests,  and  the  dis- 
turbed condition  of  English  agricultural  labor. 
But  the  primary  cause  was  that  the  population  of 
England  was  increasing  beyond  what  the  agricul- 
tural resources  of  the  country  could  support. 
These  conditions  attracted  the  attention  of  thinkers 
to  the  agricultural  industry.  The  law  was  formu- 
lated that  when  the  quantity  of  labor  and  capital 
applied  to  a  piece  of  land  is  increased  by  a  given 
amount,  the  returns  yielded  by  the  land  will  be 
increased  in  a  less  than  proportional  degree.  The 
best  lands  are  naturally  first  brought  under  culti- 
vation. If,  then,  the  increase  of  population  re- 
quires that  poorer  land  shall  be  cultivated,  the 
application  of  labor  and  capital  to  this  inferior 
land  will  result  in  a  smaller  product  than  that 
received  from  a  similar  expenditure  upon  the  best 
land.  Thus  the  law  of  diminishing  returns  is  held 
to  characterize  the  cultivation  of  the  soil. 

Ricardo  pointed  out  that  if,  as  population  in- 
creased, it  was  necessary  to  take  inferior  sorts  of 
land  into  cultivation,  the  cost  of  producing  the  mini- 
mum supply  of  food  upon  which  the  wage-earner 

59 


ECONOMIC   CRISES 

could  subsist  would  increase ;  under  the  condition,  ♦ 
therefore,  that  the  population  is  increasing,  wages 
must  form  an  increasing  factor  in  the  cost  of  pro- 
duction and  profits  must  fall. 

This  explanation  of  declining  profits  superseded 
that  of  Adam  Smith,  It  was  as  a  corollary  of  the 
law  of  diminishing  returns  in  agriculture  that  the 
tendency  of  profits  to  a  minimum  was  at  this  time 
discussed.  The  former  law  was  given  an  emphasis 
which  corresponded  with  the  pessimistic  view 
taken  by  economists  of  the  future  of  England's 
industries.  A  shadow  was  cast  by  it  over  the 
economic  discussions  of  the  period.  The  thing 
that  they  could  not  overlook  was  that  the  land 
of  England  was  very  limited  in  quantity.  The 
idea  of  a  possibility  of  increasing  the  product  of 
the  soil  by  improving  the  methods  of  cultivation 
was  swept  aside  as  a  temporary  expedient.  The 
exhaustless  field  for  the  employment  of  capital  pre- 
sented by  foreign  trade  was  hardly  as  yet  realized. 
The  tendency  of  profits  to  a  minimum  was  dis- 
cussed by  Wakefield  and  Chalmers,^  but  the  theory 
was  developed  and  brought  into  definite  connec- 
tion with  the  subject  of  crises  by  John  Stuart 
Mill.3 

2  Dr.  Chalmers  was  strangely  confused  as  to  the  difference 
between  the  balancing  of  the  factors  in  production  and  the  bal- 
ancing of  the  forces  governing  production  and  consumption.  See 
"  Political  Economy  and  the  Moral  State  and  Prospects  of  Soci- 
ety," pp.  105,  106,  and  pp.  157,  158. 

3  "  Principles  of  Political  Economy,"  Bk.  I,  Chs.  IV,  V,  VI, 
XI;   Bk.  II,  Ch.  XV;   Bk.  IV,  Chs.  Ill,  IV,  V,  VI. 

60 


THE   PROBLEM  OF   CAPITAL 

The  theory  as  perfected  by  this  writer  is  as 
follows :  Profits  depend  upon  the  disposition  to 
save  and  the  field  of  employment  open  for  capital. 
It  is  pointed  out  that  the  tendencies  leading  to  the 
accumulation  of  capital  are  strong  in  England. 
The  opportunities  which  are  open  for  the  employ- 
ment of  capital  are  constantly  on  the  verge  of 
being  entirely  occupied ;  however,  from  time  to 
time  events  take  place  which  create  new  openings. 
There  exists  a  boundary  of  profitable  investment 
which  is  frequently  in  plain  sight,  but  which  is 
from  time  to  time  being  expanded  by  unforeseen 
occurrences  such  as  the  perfecting  of  inventions 
and  improvements  of  one  sort  or  another.  The 
application  of  capital  to  the  cheapening  of  the 
necessaries  of  life  by  means  of  which  wages  may 
be  reduced  affords  a  means  of  increasing  profits. 
The  opening  of  foreign  trade  provides  an  outlet 
for  capital,  and  relieves  the  pressure  of  competing 
capital,  which  would  otherwise  quickly  reduce 
profits  to  a  minimum  in  a  country  so  small  and  so 
frugal  as  England.  Should  these  means  for  a 
time  fail,  profits  would  soon  fall  to  such  a  point 
that  they  would  merely  induce  the  saving  neces- 
sary to  keep  intact  the  capital  then  in  existence. 
Industry  will  then  have  reached  the  "  stationary 
state." 

While  the  influences  which  expand  the  market 
are  occasional,  the  tendencies  which  promote  the 
growth  of  capital  are  continuous.  There  are, 
therefore,  frequently  considerable  periods  of  time 

6i 


ECONOMIC   CRISES 

when  capital  is  growing  more  plentiful  and  profits 
are  falling.  But  a  decline  in  profits  is  unwelcome, 
and  is  by  no  means  endured  with  equanimity  or 
without  attempts  at  escape.*  The  search  for  new 
fields  of  investment  in  which  capital  may  be  made 
to  yield  large  returns  is  stimulated  by  a  general 
decline  of  profits.  When  the  prevailing  rate  of 
profits  is  low,  the  capitalist  is  willing  to  make  more 
daring  ventures  and  run  greater  risks  to  secure 
large  remuneration.  The  decline  of  profits  stimu- 
lates speculation.  The  greater  and  more  rapid 
this  fall,  the  more  reckless  the  ventures  to  which 
it  will  give  rise.  Railways  are  built  in  the  hope 
that  industries  will  grow  up  along  their  lines  in 
the  future,  mines  are  opened  in  the  hope  of  creat- 
ing valuable  property,  manufactories  are  con- 
structed depending  upon  contingent  markets.  Any 
new  thing  which  promises  relief  is  eagerly  listened 
to.  The  period  of  speculation  during  which  invest- 
ments are  made  is  followed  by  a  period  of  expec- 
tancy, which  soon  changes  to  distress  as  the  results 
of  rash  investments  become  known.^  A  break- 
down   occurs,    which    spreads   ruin    through    the 

*  The  truth  of  this  is  embodied  in  the  well-known  proverb, 
"  John  Bull  can  stand  a  good  deal,  but  not  two  per  cent."  Illus- 
trations of  absurd  production  are  given  by  E.  de  Laveleye  in 
"Revue  des  Deux  Mondes,"  1865,  p.  210. 

'  The  effect  of  misdirected  investments  is  pointed  out  by  Bonamy 
Price,  "Contemporary  Review,"  May,  1879.  The  dangers  which 
beset  a  country  rapidly  increasing  in  wealth  are  noticed  by  Courcelle- 
Seneuil,  "Journal  des  Economistes "  (2d  Series),  Vol.  XLIII, 
P-  34. 

62 


THE   PROBLEM    OF   CAPITAL 

unsound  structures  of  business,  and  the  suspicion 
which  is  aroused  tries  to  the  utmost  the  solidity  of 
all  enterprises.  In  the  degree  in  which  the  com- 
petition of  capital  leads  to  rash  investment  it 
accomplishes  the  waste  and  destruction  of  capital. 
The  capital  tied  up  in  unnecessary  duplication  of 
railways,  unused  mines,  and  superfluous  factories 
does  noi  ninister  to  the  production  of  wealth,  and, 
therefore,  loses  its  character  as  capital  or  wealth. 
These  losses  relieve  the  pressure  of  the  competi- 
tion of  capital  for  investment.  They  throw  away 
part  of  the  savings  of  society,  and  they  do  not 
create  new  industries  from  which  an  annual  saving 
can  be  made.  In  this  expensive  but  automatic 
manner  the  fall  of  profits  is  checked.  If  specula- 
tion has  been  very  intense  and  the  loss  of  capital 
is  great,  the  rate  of  profit  may  even  be  somewhat 
advanced  above  what  it  was  when  speculation 
began.  The  restoration  of  a  satisfactory  rate  of 
profits  removes  the  desire  to  embark  in  speculative 
enterprises.^  Business  is,  for  a  time,  carried  on  in 
a  normal  and  conservative  manner.  The  higher 
rate  of  profits,  however,  affords  a  new  impulse  to 
the  tendency  to  save.  The  increase  of  capital 
begins  again.  If  the  field  for  the  legitimate  in- 
vestment of  these  accumulations  does  not  open  as 

^  On  the  basis  of  this  theory,  it  has  been  maintained  that  a 
privileged  bank  should  not  discount  freely  to  keep  down  the 
rate  of  interest,  since  low  rates  of  interest  are  what  give  rise  to 
the  speculative  spirit.  —  Adolph  Wagner,  "  Lehre  von  den  Banken," 
pp.  233-237. 

63 


ECONOMIC   CRISES 

rapidly  as  the  capital  is  furnished,  a  condition  of 
over-supply  again  results  with  consequent  fall  in 
profits  and  the  rise  of  over-speculation  which  ends 
as  before  in  crises  and  loss."  Thus,  there  is  estab- 
lished a  cycle  of  influences  which  produces  recur- 
rent periods  of  industrial  distress. 

The  writers  before  John  Stuart  Mill  made  very 
important  the  part  which  the  losses  of  the  crises 
played  in  relieving  the  competition  of  capital.  It 
is  indicative  of  a  later  phase  of  English  industrial 
progress  that  Mill  should  have  placed  more  em- 
phasis than  did  these  writers  upon  the  openings 
provided  for  capital  by  foreign  trade  and  by  inven- 
tions for  reducing  the  cost  of  the  necessaries  of 
Hfe.  The  older  economists  placed  too  much 
emphasis  upon  land  as  fixing  the  limit  of  capital 

"^  The  testimony  of  economic  history  is  by  no  means  clear  as 
to  the  connection  between  crises  and  periods  of  declining  rates 
of  interest.  J.  S.  Mill  mentions  (Bk.  I,  Ch.  XI,  Sec.  3)  that  the 
rate  of  interest  in  Holland  at  the  time  of  its  prosperity  was  two 
per  cent  and  three  per  cent.  Certainly  the  crises  that  have  visited 
Holland  since  that  time  cannot  be  attributed  to  the  tendency  of 
profits  to  a  minimum.  In  the  middle  of  this  century,  the  common 
rate  of  interest  paid  in  the  English  cotton  industry  for  money  was 
2I  per  cent.  ("  Edinburgh  Review,"  1849,  p.  429.)  Tooke  has  given 
examples  of  speculation  occurring  at  the  time  of  a  rise  in  interest,  as 
in  1796  in  provisions,  in  1808  in  general  merchandise,  and  in 
1814  in  export  articles.  See  "  History  of  Prices,"  Vol.  Ill,  p.  159, 
On  the  other  hand,  the  sudden  reduction  of  interest  upon  the  pub- 
lic debt  of  England  is  enumerated  as  one  of  the  causes  of  the 
speculative  excitement  of  1825.  Tooke,  3id.,  Vol.  II,  p.  148  ff. 
Wagner  considers  a  decline  of  profits  important  in  connection 
with  crises,  oJ>.  cit.,  p.  530  ;  so  also  does  Roscher,  "  Grundlagen," 
Bd.  I  (21st  Ed.),  Sec.  188. 

64 


THE   PROBLEM  OF  CAPITAL 

growth.  They  did  not  appreciate  the  world  of 
new  investments  which  the  application  of  inven- 
tion to  the  means  of  ocean  transportation  might  be 
made  to  open  for  English  capital.  The  thing  that 
was  cramping  and  choking  industry  and  rendering 
its  savings  useless  was  the  lack  of  human  genius 
and  organizing  power  sufficient  to  open  this  new 
world.  The  economists  then  had  much  to  say 
of  the  "niggardliness  of  nature,"  while  we  now 
think  that  progress  depends  chiefly  upon  the 
talent  and  virtue  of  man. 

Their  mistake  was  one  of  emphasis.  Land 
seemed  the  chief  factor  in  the  problem  of  progress, 
while  wheat  was  exorbitantly  high  during  the  first 
years  of  this  century.  The  problem  has  shown 
new  aspects  since  that  period.  Since  1840  foreign 
trade  has  brought  about  the  paradox  that  while 
the  price  of  bread  has  been  lowered,  the  wealth  of 
England  has  been  steadily  increasing,  and  at  the 
same  time  the  value  of  English  land  and  the  acreage 
under  cultivation  have  decreased. 

Having  before  us  the  theory  which  economic 
literature  affords  us  on  the  relation  between  the 
accumulation  of  capital  and  economic  crises,  let  us 
examine  into  the  character  of  this  relation  a  step 
further.  It  is  a  common  assertion  that  the  chief 
cause  of  the  recent  vast  increase  of  the  world's 
productive  power  is  due  to  the  use  of  capital. 
The  meaning  which  is  commonly  conveyed  by 
the  phrase  "  the  use  of  capital  "  is  a  narrow  and 
technical  one.     It  is  common  to  think  of  the  prob- 

F  65 


ECONOMIC   CRISES 

lera  of  capital  as  merely  the  problem  of  how  to 
equip  a  given  industrial  plant  in  such  a  way  that  it 
will  yield  as  large  a  product  as  possible.  It  is 
true  that  the  use  of  capital  enables  man  to  com- 
mand the  forces  of  nature  to  assist  in  a  specific 
act  of  production.  But  the  success  of  man's  activ- 
ity in  ministering  to  his  own  material  well-being 
depends  upon  something  more  than  his  capacity 
to  produce  plentifully  certain  kinds  of  goods. 
The  problem  raised  by  the  crisis  is  broader  than 
that  of  a  given  machine  or  factory  or  industry, 
and  lies  in  the  maintaining  of  proper  relations 
between  industries  and  men's  wants. 

If  the  present  employment  of  capital  leads  only 
to  over-production  along  certain  lines,  it  cannot  be 
said  that  we  are  completely  equal  to  the  task  of 
using  capital.  There  must  be  ability  to  organize 
and  properly  coordinate  the  forces  of  production 
and  to  distribute  their  activity  evenly  over  the 
entire  field  of  production  in  which  demand  will 
sanction  their  use,  before  it  can  be  said  that  we 
have  in  a  broad  sense  mastered  the  problem  of  the 
use  of  capital.  To  be  able,  in  the  broadest  sense, 
to  "use  capital"  implies  not  only  the  power  to 
employ  it  successfully  in  bringing  into  existence 
this  or  that  good,  but  also  the  power  to  so  organize 
the  system  of  industry  and  so  develop  the  wants 
of  society  as  to  accommodate  and  turn,  without 
friction  or  waste,  this  increased  productive  power 
to  the  service  of  man. 

The  literature  devoted  to  crises  and  the  common 
66 


THE   PROBLEM  OF  CAPITAL 

testimony  of  business  men  leave  no  doubt  but 
that  production  often  runs  unduly  ahead  of  con- 
sumption, and  that  the  markets  of  certain  regions 
are  frequently  in  a  state  of  glut  with  reference  to 
certain  commodities.  These  are  partial  gluts,  but 
in  the  period  of  greatest  stringency  in  the  climax 
of  a  crisis  there  is  often  such  a  general  and  exces- 
sive cautionary  restriction  of  consumption  as  to 
produce  temporarily  an  almost  universal  glut.^  A 
failure  to  adjust  production  to  consumption  which 
results  in  a  partial  glut,  with  consequent  demoraliza- 
tion and  loss  in  certain  lines  of  industry,  may  in  a 
credit  economy  easily  precipitate  a  general  rupture 
of  the  equilibrium  of  trade.  If  the  machinery  of 
credit  is  so  far  weakened  at  any  point,  by  a  partial 
glut,  as  to  awaken  general  suspicion  as  to  the 
soundness  of  that  machinery,  the  suspicion  may 
give  rise  to  such  a  demand  for  liquidation  as  will 
precipitate  a  general  crisis.  A  crisis  naturally 
promotes  general  economy  in  consumption.  The 
result  of  this  may  be  that  the  pressure  to  convert 
stocks  of  goods  into  cash  in  the  face  of  a  failing 
market  will  result  in  a  temporary  but  very  general 
overstocking  of  markets  ^  and  a  diminution  of  every 

*  Commodities  that  can  serve  as  money  being  excepted.  For 
a  discussion  of  the  effect  of  a  sudden  reduction  in  consumption, 
see  Sismondi,  "Nouveau  Principes  d'Economie  Politique,"  Livre 
II,  Ch.  Ill,  pp.  82,  83,  and  William  Smart,  "  Contemporary  Re- 
view," May,  1888,  p.  691. 

^  During  a  crisis,  a  glut  may  extend  to  products  that  have  not 
been  produced  in  excess  of  what  the  normal  demand  would  war- 
rant.—  Hobson,  "Evolution  of  Modern  CapitaHsm,"  Ch.  VII,  Sec.  i, 

67 


ECONOMIC   CRISES 

effective  demand  except  that  for  the  more  cumber- 
some medium  of  exchange  suddenly  demanded  to 
take  the  place  of  credit. 

This  condition  has  been  variously  called  one  of 
over-production  and  one  of  under-consumption. 
The  latter  of  these  two  designations  is  preferable, 
as  the  initiative  in  the  general  change  is  most  fre- 
quently taken  by  demand.  The  supply  cannot  be 
immediately  altered  to  accommodate  this  change. 
The  trouble  is,  however,  obviously  a  lack  of 
adjustment  between  the  forces  governing  demand 
and  supply.  Any  step  which  can  be  taken  to 
improve  this  adjustment  and  set  up  a  regulative 
and  connective  machinery  will  be  a  step  in  the 
right  direction.  Crises  present  evidences  of  gen- 
eral distress  for  which  a  general  cause  has  quite 
naturally  been  sought.  By  confining  study  to  the 
period  of  panic  it  is  easy  to  believe,  from  the 
temporary  conditions  prevailing,  that  the  cause 
of  distress  is  general  over-production.  But  such 
an  explanation  is  not  true.  Disproportion  in  pro- 
duction may  precipitate  a  crisis ;  the  consequent 
distress  is  general,  not  because  over-production  has 
been  general,  but  because  the  loss  suffered  by  one 
industry  has  destroyed  credit  which  is  a  general 
bond  of  industrial  society. 

A  partial  glut,  which  is  to  be  distinguished  from 

pp.  167,  168.  J.  S.  Mill  maintained  that  there  might  be  a 
general  excess  of  products,  not  because  of  over-production,  but 
because  of  the  effect  of  a  lack  of  confidence.  "  Some  Unsettled 
Questions  of  Political  Economy,"  Essay  II. 

68 


THE    PROBLExM   OF   CAPITAL 

the  general  glut  of  the  panic  period,  is  the  evi- 
dence that  the  producing  power  of  society  has  not 
been  properly  directed  in  the  satisfaction  of  social 
needs.  If  the  chief  increase  of  the  productive 
power  of  industry  comes  through  the  introduction  of 
capital,  gluts  must  be  looked  upon  as  evidence  that 
capital  has  put  us  in  possession  of  productive  powers 
which  we  do  not  yet  know  how  to  utilize  properly. 

The  introduction  of  capital  makes  the  act  of 
production  a  more  roundabout  and  long-continued 
one.  The  greater  the  amounts  of  capital  employed, 
the  more  does  the  specialization  of  capital  depend 
upon  forecasts  of  the  condition  of  the  market  at 
a  relatively  distant  time.  The  lengthening  of  the 
period  of  time  over  which  the  act  of  production 
is  extended  increases  the  liability  that  before  the 
good  is  completed  the  demand  for  it  will  have 
disappeared. 

A  glut  of  commodities  can  be  easily  prevented 
or  reduced  by  merely  stopping  the  wheels  of  in- 
dustry. But  the  capital  which  has  been  specialized 
to  produce  those  commodities,  and  the  plans  of 
operation  that  have  been  perfected,  cannot  be 
transferred  to  other  sorts  of  productive  activity 
without  great  loss.  The  misapplication  of  pro- 
ductive power  which  is  revealed  in  the  glut  causes 
a  loss  in  the  unnecessary  goods  produced,  in  the 
sacrifice  which  attends  the  transfer  to  some  other 
line  of  production,  and  in  the  distress  which 
the  failure  of  one  branch  of  production  may  com- 
municate to  the  rest  of  economic  society. 

69 


ECONOMIC   CRISES 

The  growth  of  industry  does  not  take  place  with 
that  perfection  of  constant  readjustment  of  parts 
and  functions  which  characterizes  the  growth  of 
the  true  organism ;  it  is  accompanied  by  suffering 
and  uncertainty.  Any  increase  in  disposable  capi- 
tal necessitates  a  readjustment  of  the  factors  of 
production  to  one  another  and  brings  up  the  gen- 
eral problem  of  the  organization  of  industry  in  all 
its  parts.  As  a  producer  of  wealth  man  has  three 
powers,  the  power  to  labor,  to  save,  and  to  man- 
age. In  order  that  industrial  society  shall  be 
prosperous,  these  three  powers  must  exist  and  be 
exercised  in  proper  proportion.  In  the  early 
stages  of  industry  the  first  two  appear  most  im- 
portant. Our  economic  life  increasingly  demands 
managerial  ability.  The  manager  must  not  only 
strive  to  increase  production  by  improving  the 
way  in  which  land,  labor,  and  capital  are  related 
to  one  another,  but  must  correlate  production  and 
consumption  not  only  by  the  proper  distribution 
of  productive  power  but  if  necessary  by  educating 
and  stimulating  consumption. 

The  application  of  the  productive  power,  which 
comes  from  the  use  of  capital,  in  such  a  way  as 
to  promote  a  well-balanced  growth  of  industry  is 
rendered  difficult  by  the  fact  that  equal  amounts 
of  capital  devoted  to  different  industries  do  not 
produce  the  same  increase  in  product,  inasmuch 
as  there  are  businesses  of  increasing,  constant,  and 
diminishing  returns.  Capital  is  not  as  important 
a  factor  in  some  lines  of  production  as  in  others. 

70 


THE   PROBLEM   OF   CAPITAL 

Capital  seeking  investment  is  never  distributed 
evenly  to  all  branches  of  industry.  Indeed,  new 
capital  is  not  permitted  to  compete  with  equal 
freedom  in  all  parts  of  the  economic  field.  Large 
aggregates  of  capital  effectively  organized  for 
defensive  purposes  discourage  small  capitals  from 
entering  the  lists  against  them.  Just  as  public 
thought  is  seldom  distributed  with  proper  empha- 
sis, and  as  public  interest  unduly  exploits  a  few 
topics  upon  which  attention  has  been  fixed,  at  the 
expense  of  other  matters  which  are  in  need  of 
more  publicity  than  they  receive,  so  industry  bears 
the  evidences  that  the  productive  powers  of  society 
are  unduly  concentrated  along  a  few  lines.  Prog- 
ress seems  largely  made  up  of  uneven  starts  and 
advances.  Some  sciences  are  for  a  time  accorded 
veritable  "  booms "  and  become  "  fads,"  while 
others,  equally  useful,  are  for  a  time  relatively 
neglected.  In  consumption  the  refinement  and 
precision  of  popular  taste  along  some  lines  are  by 
no  means  paralleled  in  other  fines.  So  in  the 
distribution  of  productive  power  the  application 
of  labor-saving  devices  has  made  much  more  rapid 
progress  in  some  industries  than  in  others.  And 
production  as  a  whole  has  been  studied  to  the 
neglect  of  consumption,  and  of  the  means  of  or- 
ganization and  control  necessary  to  coordinate  the 
two. 

When  a  market  has  been  oversupplied,  and 
prices  have  been  unduly  depressed,  and  with  them 
profits,  the  wrong  kind  of  virtue  has  often  been 

71 


ECONOMIC   CRISES 

invoked.  It  seems  to  many  as  if  industry  was 
like  war.  Anglo-Saxon  pugnacity  has  been  forti- 
fied by  precepts  exalting  grit  and  staying  power. 
The  result  is  that  industrial  struggles  are  too  com- 
mon, the  object  of  which  is  not  so  much  to  dis- 
tribute properly  productive  power  in  industry,  as  to 
enlist  all  available  capital  and  brains  in  an  attempt 
to  whip  somebody  else  into  bankruptcy.  An 
escape  from  small  profits  has  too  often  been  be- 
lieved to  exist  only  through  securing  the  economies 
of  production  on  a  large  scale. 

These  are  some  of  the  circumstances  which 
have  led  to  unnecessary  reduplication  of  plant, 
and  an  over-investment  of  capital,  particularly  in 
businesses  of  increasing  returns.  The  extent  of 
this  can  be  judged  in  some  cases  by  the  number  of 
establishments  closed  by  trusts,  which  have  main- 
tained the  same  product  by  operating  a  few  plants 
to  full  capacity.^*'     The  evils  attending  the  misap- 

10  «  Even  before  the  days  of  the  Cotton  Oil  Trust,  numerous 
presses  and  refineries  had  for  a  long  time  been  inactive.  The 
trust  closed  at  once  more  than  a  dozen  of  the  small  old-fashioned 
mills.  The  same  thing  happened  vi'ith  the  Sugar  Trust,  which 
can  supply  the  whole  market  with  the  product  of  one-fourth  of 
the  plants  it  owns.  The  Whiskey  Trust  immediately  closed  sixty- 
eight  of  its  eighty  distilleries,  and  with  the  remaining  twelve  was 
enabled  to  furnish  the  same  output  as  before,  and  soon  to  largely 
increase  it."  —  E.  von  Halle,  "  Trusts  or  Industrial  Combinations 
in  the  United  States,"  p.  66.  The  manufacturers  of  hosiery  at 
Chemnitz,  Saxony,  maintain  that  that  city  could  easily  turn  out 
five  times  its  present  enormous  product  if  the  market  would  war- 
rant. Cons.  Rep.,  September,  1897,  P-  63.  Mr.  Simon  Sterne  is 
responsible    for   the  assertion  that   "  no  railway,  even  when  it   is 

72 


THE   PROBLEM   OF  CAPITAL 

plication  of  capital  are  manifestly  increased  by 
anything  which  increases  the  amount  of  wealth 
devoted  to  further  production  until  a  rational 
means  of  employing  this  wealth  has  been  discov- 
ered. The  unequal  distribution  of  wealth  gathers 
together  the  products  of  industry  into  the  hands 
of  a  few  in  excess  of  what  is  needed  for  providing 
the  necessaries  and  comforts  of  life,  and  creates  a 
situation  in  which  the  conversion  of  a  large  part 
of  the  social  dividend  into  capital  is  easy.  Such 
accumulation  is  accompanied  by  little  of  the  "  ab- 
stinence "  of  which  economists  had  formerly  much 
to  say.  Large  fortunes  increase  with  truly  appall- 
ing rapidity  when  kept  long  intact.  Institutions 
which  gather  together  small  savings  and  facilitate 
their  investment  increase  the  amount  of  capital 
seeking  employment. 

Wealth  should  not  be  devoted  to  production 
without  a  proper  consideration  of  the  demand 
upon  which  the  intended  production  must  depend. 
Saving  should  always  be  properly  coordinated  with 
its  final  aim,  consumption.^^     To  express  the  same 

most  actively  employed,  is  worked  at  anything  more  than  a  small 
percentage  of  its  maximum  capacity." — Address  before  National 
Board  of  Trade,  New  York  City,  1878.  It  is  notoriously  true 
that  the  wholesale  and  retail  trade  of  the  country  is  on  a  scale 
fitted   to  render  many  times  its  present  service. 

1^  See  Hearn,  "  Plutology,"  Ch.  VII,  Sec.  6.  Sismondi,  Lauder- 
dale, Malthus,  and  Chalmers  all  agree  that  capital  can  only  be 
amassed  with  profit  to  a  certain  point.  On  the  other  hand,  J.  B. 
Say,  James  Mill,  Ricardo,  McCulloch,  and  Senior  adopted  the 
imperfect  ideas  of  Adam  Smith.  See  Robertson,  "The  Fallacy 
of  Saving,"  p.  29. 

73 


ECONOMIC   CRISES 

thing  in  another  way,  the  economic  mechanism 
will  not  run  smoothly  unless  a  proper  proportion 
is  maintained  between  final  and  productive  con- 
sumption, that  is,  between  the  use  of  goods  for 
human  enjoyment,  and  their  use  to  assist  in  pro- 
ducing other  goods.  A  small  productive  consump- 
tion, by  restricting  the  productivity  of  labor,  compels 
a  small  final  consumption.  A  large  productive 
consumption,  by  increasing  the  productivity  of 
labor,  may  render  possible  an  increased  accumu- 
lation of  wealth,  but  it  renders  imperative  an 
increased  final  consumption.  Otherwise,  consum- 
ers' goods  will  fail  to  return  their  values  to  their 
producers,  and  they  and  the  specialized  capital 
necessary  to  produce  them  will  be  degraded  in 
worth.  The  future,  as  such,  never  comes.  The 
habit  of  preferring  the  future  may  become  so  fixed 
as  to  crowd  out  the  very  realizations  for  which  it 
was  established,  and  in  connection  with  which  it 
is  alone  reasonable.  The  increased  consumption 
which  is  made  possible  by  saving  can  only  be 
realized  in  contention  with  the  habit  formed  to 
provide  the  means  for  its  realization. 

We  have  long  enough  been  saying,  "  If  we  can 
only  produce  enough,  consumption  will  take  care 
of  itself."  Nothing  will  take  care  of  itself.  The 
mistake  has  been  analogous  to  that  fanatical  doc- 
trine which  counselled  its  followers  to  look  after 
the  interests  of  a  future  Ufe,  and  leave  those  of 
this  life  to  take  care  of  themselves. 

Relief  from  the  problem  of  applying  capital  to 
74 


THE   PROBLEM   OF   CAPITAL 

production  is,  of  course,  temporarily  afforded  by 
the  destruction  of  capital.  John  Stuart  Mill,  as 
we  have  already  seen,  emphasized  the  relief  which 
is  afforded  by  the  losses  suffered  during  a  crisis. 
Such  a  remedy  is  too  heroic  and  too  temporary  in 
character  to  command  our  attention.  So  also  the 
extravagant  use  of  wealth  may  afford  a  relief .^^  but 
through  a  remedy  as  bad  as  the  disease.  Many 
who  admit  the  relief  which  results  from  a  loss  of 
capital  are  not  willing  to  admit  the  relief  which 
results  from  luxurious  expenditure.  Such  persons 
probably  hold  their  opinion  because  they  look  upon 
luxury  as  wasteful  and  anti-social.  But  so  is  the 
loss  of  capital  suffered  in  crises  wasteful  and  anti- 
social. These  losses  are  no  more  a  real  relief  for 
industry  than  blood-letting  is  a  universal  panacea 
for  the  ills  of  the  human  body. 

The  only  permanent  relief  is  to  be  found  in 
developing,  somehow,  new  and  intelligent  uses  for 
wealth  as  rapidly  as  wealth  shall  be  accumulated. 
Production  must  be  regulated  with  reference  to 
demand;  yet  a  gradual  increase  in  any  sort  of 
production  may  develop  its  own  market  within 
certain  limits.  In  like  manner  it  is  necessary  that 
the  supply  of  the  three  factors  of  production  should 
stand  in  some  relation  to  the  usual  method  in  which 
they  are  combined ;  yet  a  gradual  increase  of  any 
one  factor  may  be  accommodated  by  an  alteration 
in  the  methods  of  production.  The  invention  of 
machinery  and  the  elaboration  of  manufacturing 

12  Chalmers,  pp.  124-132. 

75 


ECONOMIC   CRISES 

processes  afford  new  openings  for  capital  by  in- 
creasing the  proportion  in  which  it  may  be  com- 
bined with  the  other  factors  of  production.  The 
question  is,  Will  the  application  of  these  forces  to 
the  production  of  new  classes  of  utilities  and  will 
the  education  and  expansion  of  human  wants  take 
place  as  rapidly  as  the  productive  power  of  man 
increases  ? 

To  accommodate  an  increase  of  production,  un- 
less we  are  to  be  satisfied  with  the  temporary  relief 
of  stocking  frontier  markets,  and  exploiting  the 
needs  of  primitive  peoples,  there  must  be  a  change 
in  demand,  new  wants  being  developed,  and  great 
emphasis  being  placed  upon  those  intellectual  and 
spiritual  needs  which  are  capable  of  indefinite 
increase.^^  The  development  of  man's  power  over 
nature  must  be  accompanied  by  a  study  of  the 
manner  in  which  this  power  can  be  made  to  con- 
tribute to  the  development  of  man's  higher  nature, 
and  by  a  determination  to  use  it  for  that  purpose. 

1*  In  regard  to  the  plethora  of  products,  Mr.  John  M.  Robert- 
son says :  "  The  real  cure,  as  regards  the  labour-market,  would 
be  by  way  of  extettsion  of  demand  to  objects  not  readily  produced 
in  excess;  such  as  superior  hand-made  goods  and  products  of 
art  of  all  kinds.  Here  a  glut  is  impossible  ...  It  is  not  quan- 
tity, but  kind,  of  consumption,  the  setting  up  a  continuous 
demand  which  shall  withdraw  labour  from  the  fatally  easy  frui- 
tions of  the  mechanical  manufacture  of  common  necessaries,  that 
will  prevent  chronic  depression  of  trade."  — "  The  Fallacy  of 
Saving,"  pp.  113,  114.  Cf.  Sir  Lyon  Playfair,  "Contemporary  Re- 
view," March,  1888;  David  A.  Wells,  "Contemporary  Review," 
July,  1887  ;  Carroll  D.  Wright,  in  "  Report  on  Industrial  Depres- 
sions," Washington,  1886,  pp.  80-90. 

76 


THE    PROBLEM    OF   CAPITAL 

Unless  these  larger  problems  of  the  economic  life 
are  heeded,  it  is  quite  possible  that  the  increase  of 
social  capital  may  outrun  the  development  of  social 
wants  and  the  provisions  made  for  the  use  of  cap- 
ital, because  of  poverty  of  resource,  just  as  a  private 
income  may  overtax  the  ability  of  its  possessor  to 
consume  it  intelligently.^* 

As  the  rare  social  virtues  are  highly  rewarded 
by  social  esteem,  so  the  rare  economic  virtues  are 
highly  rewarded  in  economic  returns.  If  the 
three  economic  powers  of  man,  to  labor,  to  save, 
and  to  manage,  are  not  properly  proportioned,  the 
most  scarce  of  these  powers  will  receive  a  high 
reward  at  the  expense  of  the  other  two.  The 
human  race  by  laboring  and  saving  has  been  shift- 
ing its  burdens  upon  nature  through  the  employ- 
ment of  capital,  but  its  mastery  over  nature 
requires  the  talent  of  management  in  an  increas- 
ing degree. 

When  parsimony  is  rare  it  is  highly  paid  in  the 
return  given  to  capital ;  when  it  becomes  common 
its  rewards  are  reduced.  The  methods  by  which 
the  individual  advances  his  fortunes  above  those 
around  him,  must  not  be  confused  with  the  meth- 
ods by  which  the  economic  life  of  society  is  prop- 
erly regulated.  Maxims  of  private  wealth-getting 
cannot  be  transformed  directly  into  principles  of 

"  See  J.  S.  Mill,  "  Principles  of  Political  Economy,"  Bk.  I,  Ch. 
XI,  Sec.  4.  Mill  says  to  be  wealthy  is  for  one  to  have  a  large  stock 
of  useful  articles  ("  which  he  can  use,"  adds  Mr.  Ruskin,  "  Unto  This 
Last."  — Essay  IV). 

77 


ECONOMIC   CRISES 

political  economy.^^  If  capital  is  accumulated  more 
rapidly  than  the  field  for  its  use  is  develbped,  the 
talents  of  the  organizer  are  those  demanded  and 
a  high  remuneration  will  be  given  for  organizing 
ability  rather  than  for  saving.^^    The  liberal  salaries 

1^  Smith  was  in  error  on  this  point.  Bk.  IV,  Ch.  II.  See 
Mummery  and  Hobson,  "  The  Physiology  of  Industry,"  p.  lo6  ; 
also  Mill,  Bk.  I,  Ch.  V,  Sec.  3.  Dr.  Chalmers  recognized  this  dis- 
tinction in  the  following  way :  "  This  question  turns  precisely  on 
the  balance  between  two  appetites  of  his  (the  capitalist's)  nature 
—  between  the  appetite  for  eventual  gain  and  the  appetite  for 
present  comfort.  Should  the  latter  prevail,  and  prevail  generally, 
capital  would  be  kept  down  and  profit  be  sustained.  Should  the 
former  prevail,  and  also  prevail  generally,  capital  would  be  aug- 
mented and  profit  be  depressed.  It  does  not  affect  this  conclu- 
sion, that  the  highway  of  fortune,  on  the  part  of  the  individual 
merchant,  is  to  save  as  much  and  spend  as  little  of  his  revenue 
as  he  can.  It  is  true  of  every  single  capitalist  that  he  is  all  the 
richer  by  saving  than  spending  ;  and  that  under  any  given  rate 
of  profit,  or  with  any  given  general  habit  on  the  part  of  capital- 
ists. But  it  is  not  true  that  capitalists,  collectively,  will  become 
richer  by  saving  than  by  spending ;  for  on  their  general  habit, 
the  rate  of  profit  immediately  and  essentially  depends."  —  •'  Politi- 
cal Economy  and  the  Moral  State  and  Prospects  of  Society,"  p.  91. 
See  also  J.  M.  Robertson,  op.  cit.,  pp.  90-94. 

^*  Upon  the  plethora  of  capital  and  lack  of  employment,  Will- 
iam Smart  very  pertinently  says:  "All  labor  in  the  present  day 
waits,  not  on  the  capitalist  —  that  is  a  socialist  mistake  —  but  on 
the  entrepreneur,  the  organizer.  .  .  .  The  fact  seems  to  be  that 
the  world's  progress  is  continually  outrunning  its  organizing  power. 
Production  of  anything  is  so  great  that  a  few  manufacturers  speedily 
supply  all  the  demand  for  their  goods,  and  then,  instead  of  wait- 
ing for  the  articles  to  win  their  way  and  make  a  market,  they 
double  their  production  in  order  to  cheapen  it  by  a  fraction  and 
undersell  their  rivals  ;  they  glut  the  market  and  then  throw  the 
worker  on  the  street  till  things  right  themselves.  All  the  time, 
the  world   is  wanting   and   waiting   for    other   things;    when  one 

78 


THE   PROBLEM   OF  CAPITAL 

now  paid  to  men  of  superior  organizing  power,  in 
contrast  with  the  low  rates  of  interest  prevaiUng 
upon  the  markets  of  the  world,  show  the  present 
relation  between  the  supply  and  demand  for  these 
qualities  so  necessary  to  social  progress. 

Capital,  however,  can  be  used  to  assist  in  the 
solution  of  its  own  problem.  Wealth  may  be 
used  in  the  encouragement  of  science  and  m- 
vention  and  in  opening  those  lines  of  possible 
economic  activity  which  are  not  generally  appre- 
ciated. It  may  be  used  to  promote  the  study  of 
new  markets,  to  disseminate  information  as  to 
market  conditions,  and  to  perfect  all  those  means 
of  industrial  control  which  would  further  a  system- 
atic distribution  of  capital  over  the  realm  of  indus- 
trial enterprise.  But  the  most  abundant  return, 
measured  in  terms  of  public  welfare,  will  prob- 
ably result  from  the  application  of  capital  to  the 
development  of  the  higher  and  more  social  eco- 
nomic needs  of  man. 

RESUME 

I.    A  crisis  may  be  caused  by  the  accumulation  cf  unused  or 
improperly  used  capital. 

II.  The  existence  of  unused  capital,  indicated  by  decline  of 

rate  of  profits. 

III.  Review  of  English  economic  theory  on  the  tendency  of 

profits  to  a  minimum. 
{a)  Theory  of  Adam  Smith. 

demand  is  supplied,  if  the  same  energy  were  turned  en  to  supply 
another,  there  would  be  no  over-production."  —  "  The  Dislocations 
of  Industry,"  "Contemporary  Review,"  May,  1888,  Vol.  LIII, 
pp.  695,  696. 

79 


ECONOMIC   CRISES 

(Jb)  Theory  of  Ricardo.     The  law  of  diminishing  re- 
turns.    Wages  an  increasing  share  in  dis- 
tribution, profits  a  decreasing. 
{c)  Theory  of  John  Stuart  Mill.     A  closed  field  of 
employment  leads  to  falling  profits  and  un- 
wise investments,  causing  crises. 
{d)  The  field  of  employment  and  land.     Employ- 
ment and  "use  of  capital." 
IV.   The  existence  of  improperly  used  capital  is  indicated  by 
gluts. 
(a)  The  existence  of  gluts  unquestioned,    {b)  A  par- 
tial glut  may  cause  a  general  glut,     {c)  A 
partial  glut  indicates  an  inadequate  distri- 
bution of  productive  power. 
V.   The  existence  of  unused  and  improperly  used  capital 

indicates  a  lack  of  managerial  ability. 
VI.    Remedies. 

(a)  Distribution  of  capital  in  employment  difficult, 
(i)  Effect  of  capital  in  different  industries. 
(2)  Relation  of  capital  to  land  and  labor  in 
different  industries.  (3)  New  capital  barred 
out  of  certain  fields.  (4)  Psychology  of 
overdeveloped  industries.  (5)  Industrial 
warfare  and  overinvestment.  (6)  Econ- 
omies of  production  on  a  large  scale. 
(7)  Plants  closed  by  trusts. 
{b)  Investment  must  be  coordinated  with  final  con- 
sumption. 
(c)  Relief  given  by  destruction   of  capital,  buying 

luxuries,  and  supplying  frontier  markets. 
(^)  New  uses  of  wealth  must  be  developed. 
{e)  New  and  higher  wants  must  be  developed. 
(/)  Private  maxims  of  saving  not  principles  of  polit- 
ical economy. 
(^)  Capital  applied  to  solution  of  its  own  problem. 


80 


CHAPTER  V 

CRISES  AND  THE  WAGE  SYSTEM 

In  contrast  with  the  previous  study  of  crises, 
from  the  point  of  view  of  production,  the  present 
chapter  deals  with  a  source  of  industrial  disorder 
which  has  its  seat  in  the  process  of  distribution. 
A  theory  of  crises  sometimes  known  as  the  "  Wages 
Theory,"  has  been  developed,  which  directs  atten- 
tion to  the  share  of  the  products  of  industry  re- 
ceived by  labor.  No  one  can,  in  these  days  of 
agitation  and  organization,  remain  ignorant  of  the 
fact  that  there  is  a  labor  problem  and  a  problem  of 
wages.  The  coincidence  of  the  rise  of  crises  with 
the  inauguration  of  those  general  conditions  which 
have  distinguished  the  modern  form  of  the  wage- 
earner's  problem,  has  served  to  make  the  crisis 
argument  a  convenient  handle  in  many  discus- 
sions concerning  wages. 

The  first  writer  to  furnish  a  consistent  theory 
of  the  relation  between  crises  and  the  industrial 
problem  generally  was  Rodbertus.^     That  conserv- 

1  "  A  more  deeply  cutting  criticism  of  the  present  economic 
order  with  private  property  in  land  and  capital,  than  that  penned 
by  Rodbertus  in  '  Sociale  Frage,'  pp.  1 16-119,  has  not  been 
brought  forward   by  any  English  or  French  socialist,  nor  yet   by 

G  81 


ECONOMIC   CRISES 

ative  German  jurist,  early  in"  his  writing,^  furnished 
a  most  penetrating,  though  not  entirely  new  criti- 
cism ^  of  industry,  which  aimed  to  explain  the 
economic  causes  of  poverty  as  well  as  the  recur- 
rent spasms  of  crises.* 

Rodbertus  assumed,  without  attempting  proof, 
that  all  those  goods  which  demand  serious  eco- 
nomic consideration  may  be  looked  upon  as  prac- 
tically the  product  of  labor  alone.  They  are 
valued  solely  as  the  products  of  labor.  This  being 
true,  he  held  that  the  ideal  distribution  of  prod- 
ucts is  such  as  will  give  to  each  laborer  goods 
exactly  equal  in  value  to  the  product  of  his  labor, 
excepting  only  a  reserve  necessary  to  keep  capital 
intact  and  to  provide  maintenance  for  those  per- 
forming useful  services  for  society,  but  who  do  not 
directly  participate  in  production.  Such  a  system 
of  distribution  is  very  far  from  being  the  present 
reahty.  Departure  from  this  ideal  does  more  in 
his  opinion  than  violate  principles  of  justice;  it 
violates   fundamental  economic  laws,   and  entails 

Engels,  Marx,  or  Lassalle."  —  A.  Wagner,  "  Grundlegung,"  Bd. 
II»  P-  33^-  Wagner  has  called  Rodbertus  his  great  and  honored 
teacher.     "Grundlegung,"  Bd.  I,  p.  748. 

2  The  outlines  of  this  system  of  thought  appear  in  his  first 
important  work,  published  in  1842,  entitled,  "  Zur  Erkenntniss 
unserer  Staatswirthschaftlichen  Zustande." 

*  See  especially  Anton  Menger,  "  Das  Recht  auf  den  voUen 
Arbeitsertrag  in  Geschichtlicher  Darstellung,"  2  Aufl.,  Stuttgart, 
1891,  Sec.  8. 

*"Kapital"  (Wagner-Kozak  Ed.),  p.  61.  The  connection 
between  crises  and  pauperism  is  not  emphasized  in  Rodbertus' 
earliest  writings,  but  is  dwelt  upon  later. 

82 


THE  WAGE  SYSTEM 

upon  society  a  considerable  part  of  the  misery  it 
endures.  From  time  to  time  the  present  erro- 
neous principle  of  distribution  brings  industry  to  a 
standstill  in  the  crisis.  To  point  out  the  manner 
in  which  this  takes  place,  Rodbertus  prepared  the 
following  analysis  of  the  present  capitalistic  wage 
system. 

The  productive  power  of  labor  is  to  be  estimated 
by  the  total  annual  product  of  goods.  That  the 
productivity  of  labor  is  increasing  is  evidenced  by 
the  increasing  amounts  of  goods  produced  each 
year.  The  development  of  the  mechanical  arts 
and  the  better  organization  of  labor  serve  to  in- 
crease the  product  resulting  from  each  unit  of 
labor.  It  is  since  the  time  when  the  inventions  of 
Watt,  Fulton,  Crompton,  and  Arkwright  became 
effective  in  multiplying  the  productive  power  of 
labor  that  crises  have  been  prominent.^ 

Rodbertus  asserts  that  in  modern  society  the 
condition  of  the  wage-earning  class  is  not  deter- 
mined by  the  productivity  of  its  labor.  He  who 
sells  his  toil  can  find  employment  only  after  he 
has  complied  with  the  exigencies  of  the  present 
industrial  system.  This  system  is  erected  upon 
the  basis  of  private  property  in  the  instruments  of 
production.  In  order  that  the  laborer  may  be 
supplied  with  these  necessary  instruments,  or  to 
put  it  plainly,  that  he  may  escape  destitution,  he 
must  compete  for  employment.  The  capitalist 
alone  has  the  power  of  initiative  in  production  by 

^  "  Hypothekennot,"  p.  217. 
83 


ECONOMIC   CRISES 

reason  of  his  property  rights  in  capital.  He 
chooses  to  pay  for  labor,  not  according  to  its  pro- 
ductivity, but  according  to  the  terms  set  by  demand 
and  supply.  The  supply  of  labor  will  in  the  long 
run  increase,  if  the  wages  obtained  are  more  than 
sufficient  to  provide  what  is  looked  upon  by  the 
laborer  as  the  necessaries  of  life.  If  wages  are 
less,  the  supply  of  labor  will  diminish.  Thus  the 
contest  upon  the  market  develops  the  "  iron  law  " 
that  wages  tend  to  remain  at  the  lowest  point  at 
which  a  sufficient  supply  of  labor  can  be  secured.^ 
Labor  is  sold  for  the  cost  of  production.  The 
standard  of  life  which  determines  the  acts  of  the 
laborer  with  reference  to  the  future  supply  of 
labor  is  capable  of  change,  but  its  elevation  is 
difficult. 

The  difference  between  the  amount  paid  for 
labor  and  the  product  of  labor  is  a  surplus  taken 
by  the  capitalist.  It  is  an  historical  fact,  asserts 
Rodbertus,  that  the  productivity  of  labor  has  in- 
creased more  rapidly  than  have  wages.  Thus 
wages  become  a  relatively  decreasing  share  in  dis- 
tribution, and  an  increasing  surplus  falls  into  the 
hands  of  the  capitaHst.  According  to  the  analysis 
of  Rodbertus  there  are  but  two  shares  in  produc- 
tion :  one  is  wages  with  which  labor  is  paid  but 
not  paid  for ;  the  other  share  includes  all  income 
obtained  through  the  force  of  the  right  of  private 
property  and  without  appreciable  personal  exer- 
tion.    This  includes  interest,  rent  in  the  ordinary 

8  Rodbertus,  "  Kleine  Schriften,"  p.  223. 
84 


THE  WAGE  SYSTEM 

sense,  and  profits.  It  is  collectively  designated  by 
Rodbertus  as  "rent."  That  such  a  share  as  this 
exists  is  due,  in  the  first  place,  to  the  existence  of 
a  surplus  product  of  labor  above  what  is  necessary 
to  sustain  the  laborer  and,  in  the  second  place,  to 
the  institution  of  private  property  which  gives  to 
a  few  the  power  to  seize  this  surplus.'^  Rent  then 
is,  in  plain  language,  robbery.  The  blame  for  the 
existing  condition  of  things  cannot  of  course  be 
placed  upon  the  shoulders  of  any  individual  or 
class.^  It  is  the  legitimate  product  of  the  present 
social  and  industrial  system  which  has  been  pro- 
duced by  general  social  forces  and  which  can  be 
modified  only  by  a  gradual  process  of  evolution. 

This  reasoning  is  used  by  Rodbertus  to  account 
for  the  growing  disparity  of  wealth  between  the 
capitalistic  and  the  wage-earning  classes  and  the 
sharpening  social  contrasts  which  attend  this 
divergence. 

The  accumulation  of  a  surplus  of  wealth  in  the 
hands  of  the  capitalist,  which  is  increased  by  every 
increase  in  the  productive  power  of  industry,  is  a 
process  which  obviously  cannot  continue  indefi- 
nitely. The  sale  of  the  products  of  industry 
depends  chiefly  upon  the  purchases  of  persons 
other  than  capitalists.  The  use  of  capital  increases 
the  use  of  machinery  and  the  importance  of  the 
so-called  machine  industries.    The  assertion,  which 

''  "  Kapital,"  p.  202. 

^  "  Kein  Einzelner  ist  anzuklagen,"  "  Zur  Beleuchtung  "  (Wag- 
ner-Kozak  Ed.),  p.  1S5. 

85 


ECONOMIC   CRISES 

is  made  on  good  authority,  is  therefore  significant, 
that  eighty  per  cent,  of  the  machine-made  goods 
of  the  world  are  consumed  by  the  laboring  class. 
The  cutting  off  of  the  laborer's  share  in  distribu- 
tion manifestly  in  an  equal  degree  diminishes  his 
power  to  consume  or  to  take  the  products  of 
industry  off  the  hands  of  the  producer. 

The  surplus  which  private  property  enables  the 
capitalist  to  retain  is  not  distributed  in  such  a  way 
as  to  prevent  the  final  clogging  of  industry. 
Rodbertus  denied  that  the  capitalists  had  either 
the  desire  or  the  ability  so  to  consume  this  surplus 
as  to  prevent  it  from  stopping  the  wheels  of  indus- 
try. It  seems  clear  that  if  this  surplus  were  spent 
in  unproductive  consumption  it  could  not  be 
accountable  for  the  plethora  of  unsalable  prod- 
ucts found  in  a  crisis.^  The  capitalist  is  stimulated 
by  rivalries  within  his  class  to  accumulate  his 
wealth.  The  income  which  he  receives  is  largely 
reinvested  as  capital  to  earn  a  further  dividend. 
It  results  in  an  increased  production.  With  these 
surpluses  new  mines  are  opened,  new  lands 
cleared,  and  new  industries  equipped  with 
machinery. 

A  most  important  effect  of  improvements  in 
industry  is  to  decrease  the  expense  of  providing 
the  minimum  of  the  necessaries  and  comforts  of 

*  During  the  hard  times  of  1893,  ^  meeting  of  women  workers 
was  held  in  New  York  City,  at  which  the  question  was  asked 
what  word  should  be  sent  to  the  women  of  the  wealthy  classes. 
The  answer  was,  "Tell  them  not  to  cut  off  their  luxuries." 

86 


THE   WAGE   SYSTEM 

life  with  which  the  wage-earning  class  may  be 
induced  to  propagate. 

The  increased  power  of  production  resulting 
from  the  investment  of  the  economic  surplus  does 
not  necessarily  meet  with  a  corresponding  expan- 
sion of  markets.  The  problem  of  disposing  of 
an  economic  surplus  is  not  solved  by  investing  it 
in  the  means  of  further  production.  Rodbertus 
specifically  asserted  that  speculation  had  nothing 
to  do  with  this  unwarranted  increase  of  produc- 
tion.io 

When  the  period  arrives  in  which  investments 
are  many  of  them  proving  unsuccessful  and 
profits  are  everywhere  curtailed,  it  is  most  natural 
to  practise  retrenchment.  The  capitalist  reduces 
general  expenses,  postpones  repairs,  and  reduces 
wages.  By  this  process  of  retrenchment  the  buy- 
ing power  of  the  masses  is  reduced.     As  the  mar- 

^o  Rodbertus  says  of  speculation :  "  The  part  which  speculation 
plays  is  not  worth  mention.  That  is  solely  a  local  or  temporary 
misadjustment  of  the  market,  caused  either  by  sending  goods 
to  a  wrong  market  or  by  holding  them  until  an  unsuitable  time. 
Such  misadjustments  are  always  partial,  and  do  not  in  the  slight- 
est resemble  the  general  breakdown  of  the  market  resulting  from 
commercial  crises.  The  source  of  the  evil  comes  in  connection 
with  production,  not  speculation." — "  Zur  Beleuchtung,"  p.  185. 
See  also  p.  227.  Hertzka,  a  follower  of  Rodbertus,  agrees  in 
ignoring  speculation :  "  Now  is  shown  also  the  remarkable  regu- 
larity of  the  recurrence  of  these  catastrophies,  which  have  no 
connection  with  fraud  and  over  speculation,  but  which  are  noth- 
ing less  than  the  indispensable  consequence  of  each  increase  in 
production  in  a  society,  the  economic  system  of  which  prevents 
any  enlargement  of  consumption  beyond  certain  relatively  narrow 
boundaries."  —  "Die  Gesetze  der  sozialen  Entwickelung,"  p.  106. 

87 


ECONOMIC   CRISES 

ket  becomes  less  capable  of  accommodating  the 
products  thrown  upon  it,  a  further  reduction  of 
profits  is  unavoidable.  In  this  manner  industry  is 
seized  by  a  vicious  circle  of  influences  which  sup- 
port and  strengthen  one  another  automatically. 
In  order  that  industry  may  be  prosperous,  that 
which  is  produced  must  be  marketed  at  profitable 
rates.  The  accumulation  of  a  surplus  implies  a 
curtailment  of  the  market.  The  attempt  to 
employ  this  surplus  productively  calls  for  an 
expanding  market,  and  if  this  is  not  found  the 
profits  of  capital  invested  in  production  fall.  So 
long  as  the  capitalist  attempts  to  prevent  this  fall 
of  profits  by  reducing  wages,  he  reduces  the 
demand  for  his  own  products  and  tightens  the 
noose  which  strangles  industry.  Like  the  backing 
horse  with  the  lines  wound  around  the  hub,  every 
movement  to  comply  with  the  apparent  demands 
of  the  situation  only  tightens  the  pressure. 

A  lessening  dividend  on  capital  not  only  gives 
rise  to  the  curtailment  of  various  expenses,  but  it 
enlarges  and  stimulates  production,  the  principle 
being  to  secure  the  economies  of  production  on  a 
large  scale.  With  one  hand  the  buying  power  of 
the  market  is  curtailed,  with  the  other,  quantities 
of  goods  are  thrown  upon  it.  In  the  last  stages  of 
this  "steeplechase  of  industry  "  colossal  quantities 
of  goods  are  thrown  upon  the  rapidly  failing  mar- 
ket because  the  relation  between  failing  consump- 
tion and  a  defective  system  of  distribution  is  not 
seen,  or  if  seen  is  recognized  as  beyond  the  power 

88 


THE   WAGE   SYSTEM 

of  any  individual  to  rectify.  Over-production  is 
the  result.  This  leads  to  widespread  failures  and 
insolvencies  and  finally  to  the  abandonment  or 
destruction  of  vast  amounts  of  capital  with  conse- 
quent unemployment  and  poverty.  The  explana- 
tion is  said  to  lie  in  the  relatively  decreasing  portion 
of  the  products  of  industry  given  to  labor  and  the 
consequent  cutting  off  of  effective  demand.^^ 

Many  writers  have  analyzed  the  crisis  in  a  simi- 
lar manner  as  due  to  the  growth  of  the  productive 
equipment  of  society  too  rapidly  for  its  effective 
demand.  As  to  the  remedy  for  this  condition, 
various  opinions  have  been  held.  John  Stuart 
Mill  pointed  out  that  the  waste  of  invested  capital, 
caused    by    rash    ventures    in    search   of    profits, 

^1  Theo,  Hertzka  thus  presents  the  theory :  "  The  exploitation 
of  labor  through  profits  and  ground  rents  explains  the  con- 
trast between  the  productivity  of  human  labor  and  the  wages  of 
labor,  between  the  possible  and  the  actual  well-being  of  the 
masses.  The  most  important  cause  of  the  lack  of  an  abundant 
possible  consumption  for  all  lies  in  the  misadjustment  of  pro- 
ductivity and  production,  i.e.  potential  and  actual  consumption. 
Much  less  is  produced  than  the  productive  power  of  society 
would  indicate,  because  production  must  regulate  itself  according 
to  demand,  and  this  is  held  within  narrow  boundaries  by  the 
exploitation,  which  limits  the  masses  to  bare  necessities  of  life. 
The  consumption  of  luxuries  by  the  propertied  classes  can  absorb 
only  a  small  portion  of  the  goods  possible  to  produce  in  excess 
of  what  is  required  for  the  existence  minimum  of  the  masses. 
Also  the  demand  connected  with  investment  is  fixed  within  given 
bounds  by  the  range  and  character  of  production.  Every  attempt 
to  expand  production  beyond  the  demand  for  the  purposes  of 
consumption  or  investment  leads  to  over-production  and  crises."  — 
•'  Die  Gesetze  der  sozialen  Entwickelung." 


ECONOMIC   CRISES 

brought  relief,  Chalmers,  Sismondi,  and  Robert 
Owen  suggested  that  less  be  saved  and  that  more 
be  expended,  if  need  be,  in  luxuries. ^^  Rodbertus 
calls  for  a  division  of  the  growing  surplus  among 
the  wage-earners,  trusting  that  it  will  be  expended 
properly  by  them. 

As  to  the  remedial  measures  which  may  be 
taken  to  correct  these  tendencies  of  the  present 
industrial  order,  Rodbertus  was  very  conservative. 
His  analysis  classed  him  among  the  socialists,  but  he 

12  Very  nearly  the  same  idea  occurs  in  Malthus,  "  Principles  of  Pop- 
ulation," Bk.  I,  Ch.  V,  Sec.  II,  p.  316  (7th  Ed.).  See  also  Bowen, 
"Principles  of  Political  Economy,"  Ch.  XVII,  p.  267.  U.  H. 
Crocker,  in  the  work  entitled,  "  Excessive  Saving  a  Cause  of  Com- 
mercial Distress,"  p.  13,  says:  "Let  the  economist  point  out,  if  he 
can,  how  the  idle  thousands  can  to-day  be  employed  in  producing 
'  wealth '  except  through  such  uneconomical  measures  as  the  crea- 
tion of  new  comforts  and  new  luxuries  for  those  who  are  able  to 
pay  for  them."  Herkner  states  the  effect  of  oversaving  as  follows : 
"  As  a  rule,  the  portion  of  the  social  dividend  devoted  to  capitali- 
zation exceeds  considerably  the  needs  of  industry  for  capital.  While 
new  investments  create  a  demand  for  labor,  and  in  so  far  add  to 
the  number  of  consumers  with  purchasing  power,  yet  this  purchas- 
ing power  does  not  equal  the  increase  of  goods  which  is  brought 
about  by  the  new  investment.  Should  the  purchasing  power  of 
the  newly  employed  laborers  equal  the  net  value  of  the  product 
of  the  new  undertaking,  there  would  be  neither  interest  nor  profit 
for  the  capitalist  and  undertaker.  Precisely  here  is  the  point 
when  they  have  not  the  intention  to  consume  interest,  rent,  and 
profits.  If  no  corresponding  increase  of  effective  demand  accom- 
panies the  increase  of  goods  caused  by  the  new  capital  investment, 
the  circumstance  that  a  class  of  people  year  after  year  devote  large 
sums  to  the  increase  of  production,  reserving  it  from  consumption, 
leads  soon,  in  an  isolated  economic  society,  to  a  disturbance  of 
the  balance  between  production  and  consumption."  —  Conrad's 
"  Handworterbuch,"  Bd.  IV,  p.  897. 

90 


THE   WAGE   SYSTEM 

refused  to  ally  himself  with  them.  He  believed, 
however,  that  the  evils  of  the  present  were  due  to  a 
laissez-faire  policy  which  has  left  the  problem  of 
distribution  to  work  itself  out  undirected  by  an 
intelligent  exercise  of  public  thought.^^ 

The  need  may  sometime  arise  for  interference 
on  the  part  of  the  state,  but  any  fundamental 
change  must  be  slowly  made.  Because  of  the 
educating  and  conserving  effect  of  the  institution 
of  private  property,  Rodbertus  thought  that  prop- 
erty rights  could  only  be  very  slowly  curtailed.^* 
We  may  confidently  believe,  however,  that  we  are 
in  the  midst  of  an  evolution.  Rodbertus  thought 
as  in  the  past  the  right  of  private  property  has 
been  narrowed  by  extinguishing  the  right  to  own 
human  beings,  so  in  the  future  land  and  capital 
will  be  emancipated  and  ownership  will  remain  in 
income  alone.  Ultimately  industry  must  be  regu- 
lated by  a  system  whereby  the  total  product  of 
industry  will  be  distributed  to  those  creating  it  and 
no  part  of  the  product  be  permitted  to  accumulate 
and  clog  the  industrial  mechanism. 

"  "Kapital,"  p.  6i. 

1*  "  Erklarung,"  etc.,  Bd.  II,  p.  303.  Upon  this  point  his  last 
work,  "  Kapital,"  is  more  severe.  The  inconsistency  of  the  posi- 
tions here  assumed  by  Rodbertus  has  been  pointed  out  by  Anton 
Menger,  "  Das  Recht  auf  den  vollen  Arbeitsertrag,"  Sec.  8.  Cossa 
accounts  for  the  confusion  of  Rodbertus'  thought  on  the  theory 
that  he  had  always  two  schemes  for  reform  in  mind,  —  one  for 
immediate  and  the  other  for  ultimate  realization.  Rodbertus  was 
not  always  clear  in  explaining  which  of  these  he  had  in  mind. 
Cf.  Cossa,  "Introduction  to  the  Study  of  Political  Economy," 
p.  542. 

91 


ECONOMIC  CRISES 

The  most  systematic  manner  of  accomplishing 
this  is  through  state  control.  The  right  of  using 
property  as  capital  being  reserved  exclusively  for 
the  state,  and  the  organization  and  control  of  in- 
dustry resting  entirely  with  the  state,  the  manage- 
ment of  economic  affairs  will  be  comparatively 
simple.  Two  fundamental  estimates  will  be  neces- 
sary. The  first  estimate  will  be  of  the  value  of 
the  products  of  industry  during  a  given  period  of 
time ;  the  second  will  be  of  the  number  of  hours 
of  labor  necessary  for  their  production.  In  esti- 
mating the  number  of  labor-time  units  necessary 
to  produce  a  given  article,  Rodbertus  thought  that 
the  lowest  grade  of  manual  labor  might  be  taken 
as  the  standard  of  measurement,  higher  sorts  of 
labor  being  reckoned  as  multiples  of  the  standard. 

In  an  industrial  society  so  planned,  the  products 
of  labor  would  be  received  into  public  storehouses. 
All  labor  expended  in  production  would  be  paid 
in  labor-time  checks  good  for  a  certain  value  of 
goods  at  the  storehouses.  The  use  of  money  would 
be  rendered  unnecessary.  If  computations  were 
accurate  the  value  of  all  labor-time  checks  issued 
as  wages  during  a  given  period  ought  to  exactly 
equal  in  value  all  the  products  resulting  from  in- 
dustry during  that  period,  less  whatever  goods  it 
was  deemed  necessary  to  hold  in  reserve  to  replace 
capital,  enlarge  the  productive  equipment,  support 
the  quasi-productive  members  of  society  or  defray 
the  expenses  of  non-productive  forms  of  activity 
demanded   by   public    policy.     This   statement   is 

92 


THE   WAGE   SYSTEM 

only  true  on  the  assumption  that  the  vakies  of 
goods  equal  their  labor  costs.  Under  such  a 
regime  an  increase  in  the  productivity  of  labor 
would  mean  either  a  greater  abundance  of  goods 
for  the  laborer  to  consume  or  a  release  from  labor 
by  the  shortening  of  the  working  day. 

As  Rodbertus  did  not  find  it  possible,  in  his 
thinking,  to  reduce  all  necessary  professional  and 
official  services  to  measurement  in  terms  of  a  unit 
of  manual  labor,  he  provided  in  his  scheme  for  a 
tax  which  should  support  those  rendering  these 
services. 

The  criticisms  which  suggest  themselves  in  con- 
nection with  this  theory  may  be  briefly  enumer- 
ated.^^ In  the  first  place  goods  are  not  valued  ac- 
cording to  the  labor  necessary  for  their  production 
or  reproduction.^^  This  is  not  a  disproof  of  Rod- 
is  Some  discussion  of  the  difficulties  which  such  a  scheme  as 
that  of  Rodbertus  would  meet  in  realization,  is  contained  in  "  Rod- 
bertus' Socialism,"  E.  B.  Andrews,  "Journal  of  Political  Economy," 
December,  1892;  "Scientific  Socialism  —  Rodbertus,"  Osgood, 
"Political  Science  Quarterly,"  Vol.  I,  1886,  p.  560  ff.;  Adler, 
"  Studie  iiber  Rodbertus." 

A  convenient  presentation  of  the  system  can  be  found  in  Ru- 
dolph Meyer's  "  Der  Emancipationskampf  des  Vierten  Standes," 
Berlin,  1874-75  (Bd.  I,  2  Aufl.,  1882)  ;  Dr.  R.  T.  Ely,  "  French  and 
German  Socialism  in  Modern  Times,"  New  York,  1883;  also  in 
brief  outline  in  H.  M.  Hyndman,  "The  Historical  Basis  of  Social- 
ism in  England,"  London,  1883;  W.  H.  Dawson,  "German  Social- 
ism and  Ferdinand  Lassalle." 

i<5  The  consideration  of  the  error  of  this  assumption  of  Rodbertus 
is  beyond  the  sphere  of  this  discussion.  It  is  best  dealt  with  by 
Bohm-Bawerk  in  "Capital  and  Interest,"  Bk.  VI,  Chs.  I  and  II; 

93 


ECONOMIC   CRISES 

bertus'  statement  that  an  unequal  distribution  of 
the  products  of  industry  may  be  responsible  for 
an  increase  in  production  not  accompanied  by  a 
corresponding  increase  in  final  consumption  able 
to  precipitate  a  crisis.  The  idea  that  some  uniform 
relation  must  exist  between  the  productivity  of 
labor  and  the  rewards  of  labor  in  order  that  indus- 
trial distress  may  be  avoided,  is  by  no  means 
an  exclusive  tenet  of  the  followers  of  Rodbertus. 
Von  Thuenen,  in  searching  for  a  natural  wage, 
attached  great  importance  to  a  certain  formula 
which  to  him  represented  justice.  It  was  V^^. 
In  this  "  a  "  represented  the  expenditure  of  the 
laborer  for  subsistence,  and  "  p  "  the  product  of 

Cf.  Karl  Knies,  "Geld  und  Kredit,"  Part  II;  H.  Dietzel,  "C. 
Rodbertus";   Adler,  "  Studie  iiber  Rodbertus." 

Cohn  thus  discusses  the  theory  of  value  adopted  by  Rodbertus : 
"  The  same  sophisms  which  appeared  in  the  first  presentation  of 
his  theory  of  value  are  retained  to  the  last.  They  are  something 
as  follows :  He  passes  by  in  silence  the  fact  that  Ricardo,  in  fol- 
lowing out  Adam  Smith's  teachings,  expressly  declares  that  utiHty 
is  the  necessary  premise  of  exchange  value  based  on  labor.  He 
overlooks  the  fact  that  nature  (material  and  force)  is  in  an  essen- 
tial degree  limited  relatively  to  the  wants  of  man,  —  a  principle 
which  Ricardo  strongly  emphasized  as  regards  land,  the  economic 
character  of  which  is  thereby  explained;  therefore,  the  coopera- 
tion of  nature  is  not,  as  Rodbertus  so  often  asserts,  gratuitous, 
but  is  an  element  which  must  be  taken  account  of  in  discussing 
the  production  of  value.  He  is  mistaken  in  regarding  manual  or 
'  muscular '  labor  as  a  sole  reason  for  '  costs,'  and  asserting  in 
regard  to  the  share  which  mind  has  in  production  that  this  is 
not  'an  outlay.'"  —  "A  History  of  Political  Economy."  Supple- 
ment to  Annals  of  American  Academy  of  Political  and  Social 
Science,  March,  1894,  p.  87. 

94 


THE   WAGE   SYSTEM 

labor.  The  square  root  of  the  product  of  these 
two  is  the  proper  renumeration  for  labor.  This 
formula  proposes  a  constant  relation  between  the 
productivity  of  labor  and  the  rewards  of  labor. 

It  may  be  denied,  however,  that  any  surplus, 
such  as  Rodbertus  thought  of,  accumulates  in  the 
hands  of  the  capitalist.  If  such  a  surplus  be 
admitted  it  may  be  denied  that  the  capitalistic 
class  reinvests  this  surplus  to  such  an  extent  as  to 
overstock  the  market  with  the  products  of  indus- 
try.^" These  are  questions  of  fact  to  be  examined 
as  such. 

Finally,  if  this  theory  of  crises  be  admitted  as 
sound,  it  may  be  pointed  out  that  the  socialistic 
scheme  of  production  outlined  by  Rodbertus  would 
not  work  justly,  if  indeed  it  could  be  made  to  work 
at  all.  It  provides  no  means  for  considering  the 
influence  of  any  of  the  circumstances  which  de- 
termine marginal  utility,  excepting  that  of  labor 
as  an  element  of  cost.  Adequate  recognition  is 
not  provided  for  services  in  themselves  valuable 
but  remotely  connected  with  production.     Foreign 

^^  Mr.  F.  B.  Hawley  says:  "The  claim  that  production  and 
investment  are  merely  misdirected  entirely  ignores  the  existence 
of  a  class  whose  main  object  in  life  is  not  consumption  but  accu- 
mulation. Such  a  class  will  insist  on  investing  a  large  portion  of 
their  incomes,  and  will  not  allow  their  consumption  to  exceed 
a  certain  percentage  of  the  share  of  products  that  falls  to  them. 
This  class  certainly  exists  in  a  proportion  inconsistent  with  the 
proper  balance  of  society,  and  one  cannot  appeal  to  them  with 
new  wants."  —  "National  Quarterly  Review,"  October,  1879,  p. 
282. 

95 


ECONOMIC   CRISES 

trade  would  be  rendered  difficult  and  much  of  the 
enterprise  due  to  private  ambition  would  be  ex- 
tinguished with  the  extinguishment  of  the  right  to 
use  private  property  as  capital. 

Rodbertus  considered  the  standard  of  life  rela- 
tively immobile  and  despaired  of  the  success  of 
any  reforms  aiming  to  bring  about  its  elevation. 
The  question  may  be  asked  therefore,  Under  a 
socialistic  regime,  if  the  productivity  of  labor  was 
to  increase  and  this  was  to  result  in  a  more  ample 
return  to  each  laborer,  would  not  the  ultimate 
effect  of  the  law  of  population  be  to  bring  into 
existence  a  large  population  to  live  at  a  low  stand- 
ard of  Hfe  ?  Industrial  progress  under  such  con- 
ditions would  mean  an  increase  in  the  mass  of 
low  grade  life. 

But  if  the  standard  of  life  is  not  so  incapable  of 
improvement  as  is  here  represented,  why  cannot 
all  movements  for  the  elevation  of  the  standard  of 
life  of  the  wage-earning  class  be  indorsed  as  help- 
ing so  to  distribute  wealth  as  to  enlarge  effective 
demand  more  rapidly  than  productive  capital  is 
invested,  and  to  directly  prevent  crises.^^     Labor, 

18  Von  Thiinen  was  among  the  first  to  adopt  a  broad  view  of 
the  cost  of  producing  labor.  His  position  on  education  is  thus 
shortly  stated  by  Dawson:  "Von  Thiinen  thinks  that  the  only 
way  to  raise  the  wages  of  labor  is  to  increase  the  cost  of  bringing 
up  the  laborer;  and  thus  he  advocates  the  better  education  and 
training  of  the  workmen's  children,  the  requisite  cost  being  re- 
garded as  an  indispensable  need.  The  laboring  classes  must 
learn  that  the  remedy  for  their  unfortunate  condition  lies  largely 
with  themselves,  for  it  is  at  bottom  a  question  of  population."  — 

96 


THE   WAGE   SYSTEM 

if  paid  a  price  equal  only  to  the  cost  of  production, 
is  so  paid  because  the  laborer  has  set  his  price  at 
this  point.  An  elevation  of  the  wage-earner's 
standard  will  distribute  the  surplus  liable  to  injure 
trade  into  channels  which  will  stimulate  the  buying 
market. 

No  class  in  society  has  a  right  to  call  for  eco- 
nomic rewards  without  the  exercise  of  a  reasonable 
amount  of  economic  virtue. ^^     Only  after  it  has 

"German  Socialism  and  Ferdinand  Lassalle,"  p.  42.  Cf.  J.  H. 
von  Thiinen,  "Der  isolirte  Staat,"  Rostock,  1862,  Bd.  II,  Ch.  I, 
p.  37  ff.  A  short  exposition  of  von  Thiinen's  position  is  contained 
in  Roscher's  "  Geschichte  der  National-Oekonomik  in  Deutschland," 
Miinchen,  1874,  Ch.  XXXII,  Sec.  183. 

Schippel  looks  to  education  to  combat  overpopulation.  "  Das 
Moderne  Elend,"  p.  313.  The  pressure  of  the  increase  of  popu- 
lation is  considered  by  Alexander  Everett,  an  American  writer,  as 
the  origin  of  all  progress.  So  also  holds  Schmoller,  "  Lectures  on 
Theoretical  Political  Economy,"  Berlin,  Summer  Semester,  1894. 

^^  The  benefit  features  of  labor  organizations  deserve  favorable 
consideration  for  the  effect  which  they  have  in  enforcing  upon  a 
large  scale  a  worthy  standard  of  life.  In  the  state  of  Indiana  in 
1893,  the  dues  paid  by  members  of  labor  organizations  amounted 
to  11.3  cents  weekly.  Ninety-six  out  of  212  organizations  paid 
sick  benefits,  125  out  of  217  paid  death  benefits.  With  a  total 
membership  of  19,081,  the  amount  of  sick  benefit  paid  was 
$8254,  of  death  benefit,  ^16,409.  In  commenting  upon  these 
figures,  the  chief  of  the  Bureau  of  Statistics  said:  "The  mem- 
bers of  a  vast  majority  of  labor  organizations  tax  themselves,  that 
their  families  may  not  be  a  public  charge  in  case  of  their  death 
or  disability,  and  in  this  regard  expand  to  the  full  stature  of  good 
citizens.  They  make  their  orders  life  and  accident  institutions, 
of  vast  value  to  the  state,  because  they  relieve  the  state  of 
burdens  which  in  numerous  instances  would  be  imposed  upon  it 
for  the  care  of  widows  and  orphans." — Report  of  Bureau  of 
Statistics,  Indiana,  1893-94,  pp.  118,  119. 
H  97 


ECONOMIC   CRISES 

been  shown  that  this  virtue  is  systematically  shorn 
of  its  rewards  should  appeal  to  state  interference 
be  taken. ^'^  The  state  at  present  exercises  innumer- 
able influences  through  educational  institutions 
and  the  employment  of  its  police  powers  to  encour- 
age education,  thrift,  and  sobriety.  More  directly 
through  industrial  legislation  the  wage-earning 
class  is  protected  and  favored.  A  most  important 
device  for  elevating  and  holding  firm  certain  ele- 
ments in  an  elevated  standard  of  life  is  a  system 
of  insurance  such  as  is  in  force  in  Germany.  The 
German  legislation  provides  against  accident,  sick- 
ness, old  age,  and  invalidism.  The  fund  for  an  old 
age  pension  is  recruited  one-third  each  from  the 
public  treasury,  the  employer  class,  and  the  wage- 
earning  class.  The  sums  contributed  to  provide 
insurance  against  sickness  come  one-third  from 
employers  and  two-thirds  from  laborers.  Accident 
insurance  falls  entirely  upon  employers. 

A  plan  for  systematic  effort  in  raising  the 
standard  of  life  of  the  wage-earning  classes  has 
been  formulated  by  the  economist  Professor  Lugo 
Brentano.  It  contemplates  the  voluntary  adoption 
by  societies  of  wage-earners  of  a  system  of  mutual 
insurance  covering  all  the  legitimate  costs  entailed 
in  the  production  of  labor.^^     Were  such  insurance 

2°  Professor  A.  A.  Issalev  of  St.  Petersburg  sanctions  the  inter- 
ference of  the  state  to  add  to  the  number  of  those  whose  in- 
comes increase  as  the  productivity  of  labor  is  increased.  "  Revue 
d'Economie  PoHtique,"  article  "  Les  Principales  Causes  des  Crisis 
Economique,"  Tome  VII,  1893,  p.  looi. 

21  A  list  of  the  principal  types  of  insurance  favored  by  Brentano 
98 


THE   WAGE   SYSTEM 

carried  successfully  it  would  entail  such  an  expense 
as  would  materially  strengthen  the  demand  for 
higher  wages. 

Any  scheme  for  increasing  the  standard  of  Hfe 
of  the  wage-earning  class  must  provide  for  an 
organization  sufficiently  definite  to  give  the  move- 
ment consistency,  put  definite  aims  before  its  mem- 
bers, secure  simultaneous  movement,  and,  in  general, 
make  the  desired  course  of  action  one  easy  to 
enter  upon  and  difficult  to  abandon.  More  will  be 
accomplished  by  avowing  educational  and  self- 
preservative  functions  than  by  posing  as  aggres- 
sive and  revolutionary  in  design.  The  demands 
made  should  appeal  to  all  as  reasonable  and  the 
methods  taken  to  enforce  them,  while  persistent, 
should  be  inoffensive. 

is  given  by  him  as  follows :  "  In  order  that  the  cost  of  labor  may 
be  covered,  six  types  of  insurance  are  necessary  for  the  laborer :  — 

1.  Insurance  of  the  cost  of  raising  children,  to  apply  in  case 
of  a  child's  death. 

2.  Old  age  insurance. 

3.  Burial  funds. 

4.  Invalid  insurance  or  pension. 

5.  Insurance  against  sickness. 

6.  Insurance  against  loss  of  work,  consequent  upon  crises  and 
over-production."  —  "Die  Arbeiter  u.  d.  Produktionskrisen." 

While  discussing  the  active  measures  which  may  be  taken  to 
prevent  crises,  Adler  says,  "  Such  a  relief  measure  is  the  insurance 
of  the  wage-earner  against  loss  of  work  resulting  from  crises;  for 
the  realization  of  this  project,  all  friends  of  the  present  social 
order  must  therefore  be  united."  — "  Rodbertus,"  p.  58.  More 
recently  Adler  has  argued  this  more  at  length.  Cf.  "  Ueber  die 
Aufgaben  des  Staates  angesichts  der  Arbeitslosigkeit,"  TUbingen, 
1893. 

99 


ECONOMIC   CRISES 

In  conformity  with  tiiese  principles,  Professor 
Brentano  recommends  the  formation  of  voluntary 
insurance  associations  among  the  wage-earning 
classes,  the  object  being  to  insure  to  one  another  the 
preservation,  intact,  of  every  portion  of  a  legitimate 
standard  of  life.  All  demands  are  addressed  to 
the  members  of  the  associations.  No  chain  of 
reasoning  regarding  the  origin  of  value  is  in- 
dulged in  ;  no  fundamental  principle  of  the  present 
economic  order  is  attacked ;  nothing  is  asked  from 
the  state  further  than  to  be  let  alone.^^  The  ultimate 
aim  is  manifestly  so  to  elevate  the  minimum  stand- 
ard of  life  as  to  bring. a  pressure  to  bear  upon  wages. 

The  necessity  for  such  a  movement  is  based 
upon  the  observation  that,  in  the  purchase  and 
sale  of  labor  upon  the  market,  all  the  necessary 
and  legitimate  costs  of  producing  labor  are  not 
provided  for  in  the  wages  received.  Such  trans- 
actions are  not  complete  economically,  and  do  not 
meet  the  claims  of  social  justice.  Fair  wages  must 
include  more  than  enough  to  support  the  laborer 
while  working,  and  must  cover  compensation  for 
seasons  of  idleness  due  to  sickness,  old  age,  youth, 

22  Professor  Brentano  argues  that  to  avoid  crises  by  socialistic 
measures,  it  would  be  necessary  not  only  to  strictly  control  pro- 
duction, but  to  as  strictly  regulate  consumption.  This  would  be 
an  unendurable  intermeddling  with  private  affairs.  Some  more 
flexible  plan  admitting  of  individual  initiative  is  necessary,  yet  of 
sufficient  strength  to  reach  the  present  deep-seated  evils  of  indus- 
trial society.  Cf.  "  Die  Arbeitsversicherung  gemass  der  heutigen 
Wirthschaftsordnung,"  especially  the  part  upon  "  Absatzkrisen"; 
Jahrbuch  fiir  Gesetzgebung,  "  Die  Arbeiter  and  die  Produktions- 
krisen,"  Bd.  II,  N.  F,,  1878,  pp.  565-567. 

100 


THE  WAGE   SYSTEM 

lack  of  work,  or  other  causes  beyond  the  control 
of  the  laborer.  Skill  must  be  so  paid  for  as  to 
cover  the  expense  of  education  and  the  risk  of 
failure.  The  wages  of  those  who  work  should 
include  enough  to  support  that  proportion  of  every 
normal  society  of  human  beings  which  cannot  or 
ought  not  to  be  earning  wages.^  When  one  pays 
for  a  vase  he  pays  not  merely  for  the  one  given 
him,  but  for  a  part  of  those  which  have  been  ruined 
in  the  making  or  broken  in  handling.  So  the  cost 
of  labor  should  include  the  expense  of  those  who 
die  in  youth  or  who,  in  age,  live  to  be  a  charge 
upon  others.  As  the  vase  in  fashion  must  pay  for 
a  part  of  a  superseded  stock,  so  wages  must  take 
account  of  superseded  skill.  If  these  elements  in 
the  social  cost  of  labor  are  not  provided  for  directly 
by  wage  payments,  they  must  be  surreptitiously 
added  as  public  or  private  charity.  If  withheld 
entirely,  the  deterioration  of  the  society  concerned 
is  certain.^ 

23  Condorcet  worked  out  an  elaborate  system  of  insurance,  in- 
cluding general,  education,  old  age,  widows',  and  orphans'  insur- 
ance, with  the  purpose  in  view  of  decreasing  inequalities  in  the 
distribution  of  wealth.  This  insurance,  he  thought,  should  be 
applied  primarily  to  the  lower  ranks  of  the  wage-earning  classes, 
and  should  be  controlled  either  by  the  state  or,  if  that  be  imprac- 
ticable, by  voluntary  private  associations.  The  plan  presented  by 
Condorcet,  in  "  Esquisse  d'un  Tableau  Historique  des  Progres  de 
I'Esprit  Humain,"  is  in  many  respects  similar  to  that  proposed 
by  Brentano. 

'^*  A  fine  analysis  of  the  elements  composing  the  cost  of  labor 
is  contained  in  Ernst  Engel's,  "  Der  Preis  der  Arbeit,"  Berlin, 
1868,  p.  36  ff. 

101 


UmVERSHY  OF  SOUTHERN  CALIFORNIA  LIBRARY 


ECONOMIC   CRISES 


RESUME 


I.   Crises  and  the  distribution  of  wealth  to  the  wage-earners. 
II.    Rodbertus'  philosophy  of  industrial  disorder. 

(a)  Goods  should  be  distributed  according  to  their 
labor  cost,  (d)  The  present  distribution 
causes  crises  as  follows :  (c)  The  wage- 
earner  does  not  receive  what  he  produces. 
(d)  But  the  minimum  to  satisfy  him  to  re- 
produce, (e)  The  difference  is  a  surplus 
seized  by  the  capitalist.  (/")  As  the  pro- 
ductivity of  labor  increases  more  rapidly 
than  the  standard  of  life,  wages  are  a  de- 
creasing factor  of  distribution,  (g)  Effec- 
tive demand  depends  largely  upon  wages. 
(//)  The  capitalist  invests  his  surplus  and 
increases  production  more  rapidly  than  effec- 
tive demand  increases.  (/)  The  result  is 
over-production  causing  crises. 
III.   Remedies. 

1.  Socialistic. 

(«)  Socialization  of  capital,  issue  of  labor  time 
checks  equal  in  value  to  all  goods  produced. 
Regulated  production  to  prevent  oversupply. 

(^)  Objections  :  —  Labor  theory  of  value  false. 
Higher  sorts  of  activities  underestimated. 
Foreign  trade  would  be  impeded  ;  private 
enterprise  checked.  Would  not  increased 
wages  encounter  the  Malthusian  law  of 
population  ? 

2.  Attempts  to  elevate  the  standard  of  life. 

(a)  German  state  industrial  insurance. 
(/J)  Voluntary   insurance  of  Brentano.     Volun- 
tary insurance  associations  of  workmen. 


I02 


CHAPTER   VI 

CRISES   AND    LEGISLATION 

Crises  are  socio-economic  phenomena,  and  as 
such  direct  attention  to  the  character  of  the  eco- 
nomic relations  which  exist  among  the  individuals 
constituting  a  society.  One  of  the  most  important 
ways  by  which  the  social  will  regulates  the  charac- 
ter of  these  relations  is  legislation.  Of  all  forms 
of  social  control  this  is  the  most  distinct  and  in- 
flexible. The  wisdom  with  which  it  is  exercised  is 
therefore  of  the  greatest  moment.  It  has  been 
truthfully  said  that  every  problem  has  its  legisla- 
tive side  and  bears  its  relation  to  legislation.  The 
literature  of  crises  shows  that  every  period  of  eco- 
nomic distress  has  turned  the  attention  of  many 
thinkers  to  the  criticism  of  existing  economic  legis- 
lation. Proposals  for  new  laws  and  for  revisions 
and  improvements  of  every  description  appear  in 
plentiful  crops  after  every  severe  panic.  A  large 
proportion  of  the  remedies  suggested  for  crises  pro- 
pose some  extension  of  state  activity,  either  in  the 
form  of  legislation,  agencies  for  investigation,  or 
active  government  interference.  It  should  be 
borne  in  mind,  however,  that  such  economic  legis- 
lation as  is  enacted  piecemeal  can  never  afford 
103 


ECONOMIC   CRISES 

adequate  protection.  The  purposes  of  legislative 
interference  will  be  defeated  unless  conditions  less 
artificial  and  unstable  than  those  already  existing 
are  established.  A  rational  and  comprehensive 
policy  firmly  adhered  to  (a  thing  so  rare  in  mod- 
ern industrial  legislation)  is  above  all  things  desired. 

In  judging  of  the  importance  of  the  considera- 
tions embraced  in  this  chapter,  it  should  be  remem- 
bered that,  notwithstanding  steady  improvements 
made  in  our  code  of  commercial  law,  crises  have 
been  steadily  recurrent,  and  that  those  means 
which  now  seem  most  promising  for  lessening  the 
severity  of  crises  are  not  legal  remedies.  During 
this  century  crises  have  been  developing  all 
their  peculiar  characteristics  in  countries  having 
diverse  legal  traditions  and  practices.  Further- 
more, scarcely  any  two  crises  seem  to  have 
strained  exactly  the  same  portion  of  the  net- 
work of  legal  restraint. 

No  attempt  will  be  made  in  this  chapter  to  give 
a  complete  discussion  of  the  relation  of  crises  to 
legislation.  That  would  involve  repetition,  inas- 
much as  some  portions  of  such  a  discussion  are 
necessarily  presented  in  other  chapters  of  this 
work.  The  present  discussion  will  include  the 
following  topics :  monetary  legislation,  banks,  cor- 
poration law,  and  bankruptcy  law. 

MONETARY    LEGISLATION 

As  economic  crises  usually  involve  a  serious  dis- 
turbance of  the  mechanism  of  exchange,  it  is  only 
104 


CRISES   AND    LEGISLATION 

natural  that  they  should  have  drawn  attention  to 
the  monetary  system  prevailing  at  the  time  and 
place  of  their  occurrence.^  The  diversity  of  mone- 
tary conditions  among  the  principal  countries  of 
the  world,  coupled  with  the  fact  that  most  of  them 
have  been  visited  by  crises,  warns  us  from  attach- 
ing too  much  importance  to  details  at  this  point. 
The  liberty  will  be  taken  to  present  this  subject  in 
a  very  brief  treatment,  since  the  literature  dealing 
with  it  at  length  is  generally  accessible.  The  sub- 
ject of  the  relation  of  monetary  legislation  to  crises 
is  one  which  inseparably  connects  itself  with  that  of 
credit  which  is  presented  in  the  chapter  on  "  Credit 
and  Speculation."  It  is  as  intimately  connected 
with  the  subject  of  banking  which  follows  this. 
Finally,  the  monetary  system  of  any  country  is 
only  to  be  completely  understood  through  a  com- 
prehensive study  of  the  financial  history  of  its 
government.  This  point  may  be  sufficiently 
proved  by  calling  to  mind  the  pubHc  financiering 
accomplished  through  the  Bank  of  England  and 
the  Bank  of  France  by  England  and  France  re- 
spectively. In  America  it  may  be  seen  in  the 
history  of  the  United  States  banks  and  in  the  ori- 
gin of  the  national  banking  system,  also  in  the 
present  confusion  between  the  fiscal  and  currency 

1  "  A  commercial  crisis  is  always  a  monetary  crisis  as  well,  since 
it  is  the  reduction  of  the  reserve  of  coin  in  the  banks  which  gives 
the  signal  for  the  explosion."  —  Juglar,  in  article  "  Crises  Com- 
merciales,"  Sec.  2,  in  Say's  "  Nouveau  Dictionnaire  d'Economie 
Politique." 


ECONOMIC   CRISES 

transactions  of  the  United  States  treasury.  No 
excursion  will  be  made,  however,  away  from  the 
topic  into  the  field  of  public  finance. 

The  essential  elements  of  an  ideal  monetary  sys- 
tem were  given  by  Mr.  R.  M.  Widney  before  the 
World's  Congress  of  Bankers  and  Financiers  at 
Chicago  as  follows :  sufficient  volume,  safety,  elas- 
ticity, convertibility,  uniformity,  and  circulation. 
The  necessity  of  maintaining  the  stability  of  the 
standard  of  value  needs  no  argument.  Recent 
events  in  the  United  States  show  the  effects  of 
even  a  suspicion  that  a  change  in  the  standard 
will  be  made.  A  crisis  emphasizes  the  primary 
importance  of  elasticity.  No  one  proposes  that 
the  volume  of  note  issue  shall  be  so  increased  at 
any  time  as  to  render  the  scaling  down  of  inflated 
and  unreasonable  values  to  a  sensible  figure  a  pro- 
cess either  easy  or  pleasant.  What  is  proposed  is 
that  the  trading  community  shall  feel  assured  that 
those  with  proper  securities  can  obtain  money  when 
it  is  needed.  The  English  and  American  bank-note 
systems  fail  in  this  regard.  The  Peel  Bank  Act  of 
1844  must  be  suspended  in  time  of  crisis  to  permit 
the  issue  of  notes  on  securities.  The  American 
system  leads  to  stringency  of  the  money  market 
and  the  hoarding  of  gold  (a  phenomenon  unusually 
prominent  in  1893  for  special  reasons).  This  situ- 
ation of  things  is  only  to  be  relieved  by  such  devices 
as  the  issue  of  clearing-house  certificates  and  the 
sale  of  certified  checks.  The  experiences  of  every 
crisis  in  the  United  States  enforce  the  necessity  of 

106 


CRISES   AND    LEGISLATION 

retiring  the  United  States  legal-tender  notes,  or  of 
otherwise  breaking  up  the  endless  chain  by  means 
of  which  the  government  is  forced  to  issue  the 
obligations  which  on  the  one  hand  come  back  to 
draw  out  the  gold  from  the  treasury,  and  on  the 
other  coming  in  in  payment  of  revenue,  add  noth- 
ing to  the  stock  of  gold. 

BANKS  2 

The  functions  of  a  bank  are  pointed  out  by 
F.  A.  Walker  in  his  "  Money,  Trade,  and  Industry  " 
to  be  as  follows:  (i)  to  assist  in  public  financier- 
ing; (2)  to  provide  good  money ;  (3)  to  facilitate  the 
cancellation  of  indebtedness ;  (4)  to  remit  money 
and  conduct  exchanges;  (5)  to  provide  a  place  of 
safe  deposit ;  (6)  to  serve  as  an  intermediary  in  the 
loaning  of  capital ;  (7)  to  issue  paper  currency.  Of 
these  functions  the  first  one  and  the  last  two  call 
for  special  remark  in  connection  with  the  present 
discussion,  but  the  function  of  a  bank  as  an  inter- 
mediary in  the  loaning  of  capital  is  by  far  the  most 
important  of  the  three. 

Banks  are  the  arena  of  the  money  market,  and 
what  takes  place  on  this  market  is  conditioned  in 
an  important  manner  by  the  constitution  and  cus- 
tomary practices  of  banks.     Yet  the  literature  of 

2  For  a  more  extended  discussion  of  some  of  the  topics  con- 
tained in  this  section,  see  the  author's  monograph,  "The  Relation 
of  Economic  Crises  to  Erroneous  and  Defective  Legislation,"  pub- 
lished in  Transactions  of  the  Wisconsin  Academy  of  Science,  Arts 
and  Letters,  Vol.  X. 

107 


ECONOMIC   CRISES 

crises  amply  shows  that  their  control  of  the  course 
of  the  money  market  and  their  responsibility  for 
all  that  occurs  on  it  are  greatly  overestimated- 
Banks  are  institutions  of  economic  society  which, 
like  all  other  institutions,  are  adapted  by  the 
society  using  them  to  the  working  out  of  its  pur- 
poses, just  as  the  institution  of  the  family  is 
adapted  in  different  countries  to  the  expression  of 
the  ideas  peculiar  to  the  people.  Although  the  first 
visible  signs  of  a  coming  crisis  are  to  be  detected 
in  the  banks,  and  although  the  most  spectacular 
and  distressing  phenomena  of  crises  are  usually 
enacted  in  connection  with  them,  the  rise  of  indus- 
trial storms  is  usually  elsewhere  than  in  the  bank- 
ing system. 

It  should  be,  of  course,  the  aim  of  every  intelli- 
gent community  to  place  all  necessary  safeguards 
about  an  institution  so  vital  as  that  under  con- 
sideration ;  yet  here,  as  elsewhere,  the  burden  of 
proof  lies  with  those  who  urge  restrictions.  It  is 
best  to  trust  as  far  as  experience  dictates  to  those 
automatic  checks  which  arise  from  the  operation 
of  self-interest  and  from  the  selective  process  of 
competition. 

To  enumerate  a  few  suggested  reforms  applying 
to  the  banks  of  the  United  States,  and  germane  to 
our  subject,  we  may  say  in  the  first  place  that 
adequate  safeguards  should  surround  the  granting 
of  bank  charters.  An  earnest  effort  should  be 
made  to  secure  uniformity  in  this  regard  among 
the  states  of  the  United  States,  and  to  provide  for 
io8 


CRISES   AND    LEGISLATION 

an  official  examination  and  publication  of  accounts 
which  shall  be  efficient  and  uniform.  The  pub- 
lished statements  of  banks  can  be  made  something 
more  than  a  form  if  there  is  present  in  a  trad- 
ing community  a  determination  to  have  them  so. 
What  is  needed  is  a  statement,  plain  and  simple, 
in  answer  to  the  question,  "  Is  this  bank  safe } " 
Bank  statements  should  throw  such  light  upon 
that  question  as  the  present  financial  condition  of 
the  bank  can  afford. 

The  official  examination  of  the  national  banks 
as  made  by  the  comptroller  of  the  currency  may 
serve  as  a  model  to  state  officers  in  the  matter  of 
examinations.  It  should  be  distinctly  understood, 
however,  that  such  examinations  are  in  no  way 
intended  to  relieve  bank  directors  of  their  duties. 
The  careful  scrutiny  into  the  affairs  of  a  bank 
maintained  by  its  directors  is  the  chief  safeguard 
of  its  integrity.  These  duties  of  directors  need 
careful  definition.  Every  opportunity  which  will 
not  work  undue  individual  hardship  should  be 
taken  to  make  more  clear  and  strong  the  moral 
idea  of  the  duty  of  bank  directors.  We  need  a 
greater  development  of  the  conception  of  an  honor 
office,  or  of  the  idea  of  duty  as  it  is  recognized 
by  the  legal  fraternity  in  the  United  States  at  the 
present  time  with  reference  to  guardianships.'^     A 

'  A  petition  for  a  new  banking  law  presented  to  the  Wisconsin 
state  senate  in  1899  recites  the  condition  of  affairs  with  respect  to 
bank  directors,  and  proposed  a  cure  for  the  same  as  follows :  — 

"  I.  It  is  often  the  case  that  men  of  prominence  and  responsi- 
109 


ECONOMIC   CRISES 

slovenly  and  easy-going  practice  should  not  be 
permitted  in  the  matter  of  the  bonds  given  by 
bank  officers  and  officers  of  loan  and  trust  com- 
panies. Restrictions  are  desirable  upon  the  loans 
and  discounts  made  by  a  bank  to  its  executive 
officers  and  employees,  or  to  directors  who  are  not 
officers. 

Between  banks  a  form  of  control  may  be  exer- 
cised by  a  clearing-house.  As  stock  exchanges 
can  exercise  much  control  over  the  business  con- 
duct of  their  members,  and  in  a  less  degree  of 
corporations  by  admitting  their  securities  to  the 
market  or  rejecting  them  from  it,  so  a  clearing- 
house may  be  made  a  valuable  institution  for 
control. 

Before  closing  this  section  of  the  topic  it  is 
necessary  to  take  note  of  two  important  discus- 
sions upon  the  principles  of  banking  which  are  to 
be  found  in  the  hterature  of  crises. 

The  first  is  the  discussion  as  to  which  is  prefer- 

bility  permit  themselves  to  be  directors  and  officers  of  banks 
without  having  much  interest  in  them  and  without  incurring  any 
considerable  liability  in  case  of  failure.  Such  men  are  mere  figure- 
heads or  decoys  to  draw  business  to  the  banks,  and  have  neither  a 
voice  in  the  management  nor  money  at  stake.  Hence  they  never 
trouble  themselves  with  the  affairs  of  the  bank,  or  know  its  condi- 
tion. Every  one  who  permits  himself  to  be  a  director  of  a  bank 
ought  to  be  liable  to  depositors  for  something  beyond  his  liability 
as  a  stockholder.  Make  the  directors  liable  to  depositors  for  an 
amount  equal  to  the  capital  stock  of  the  bank.  Thus,  if  the  capital 
of  the  bank  is  ^50,000,  and  there  are  five  directors,  make  each 
director  liable  for  ^10,000,  in  addition  to  his  liability  on  stock;  and 
if  the  capital  is  ^100,000,  make  each  director  liable  for  $20,000." 

IIO 


CRISES   AND    LEGISLATION 

able,  a  single  bank  of  issue  or  competing  banks. 
It  was  begun  in  France  in  1 848,  in  which  year  the 
monopoly  of  the  Bank  of  France  was  completed. 
It  was  closed  by  the  Franco-Prussian  War  of 
1870-71,  during  which  the  managers  of  the 
bank  by  their  patriotism  excited  the  general  ad- 
miration of  France.  The  gist  of  the  argument 
as  it  relates  to  crises  may  be  given  as  follows :  — 

Those  who  uphold  the  monopoly  of  note  issue 
granted  to  the  Bank  of  France,  point  to  its  record 
and  to  the  great  immunity  which  France  has 
enjoyed  from  financial  panics  as  an  evidence  of 
the  soundness  of  the  system.  The  single  bank 
system,  it  is  urged,  has  the  great  advantage  of 
locating  responsibility  in  a  definite  place.  It  puts 
an  unmistakable  duty  upon  those  in  whose  hands 
the  course  of  monetary  affairs  rests,  and  makes 
impossible  the  negligence  and  irresponsible  ven- 
turesomeness  observable  with  a  multitude  of  com- 
peting banks.  Public  opinion  is  able  to  exercise 
a  powerful  influence  when  concentrated  upon  one 
management  through  publicity  of  accounts.  The 
very  independence  of  a  bank  with  monopoly  privi- 
leges removes  from  it  all  temptation,  such  as  might 
be  presented  in  competition  with  rivals,  to  extend 
its  issues  beyond  the  limit  of  safety.  As  the  strug- 
gle to  earn  dividends  is  absent  the  bank  may  order 
its  policy  to  secure  public  welfare. 

A  competing  bank,  it  is  urged,  must  outdo  com- 
petitors to  obtain  trade,  and  it  must  therefore  be  to 
an  undue  extent  subordinated  to  the  desires  of  its 


ECONOMIC   CRISES 

patrons.  The  effect  of  competition  is  to  reduce 
the  reserves  maintained  for  redemption  of  notes 
below  the  point  of  safety.  When  such  is  the  case, 
the  presentation  of  large  quantities  of  notes  for 
redemption  or  any  other  unusual  demand  upon  the 
resources  of  the  bank  finds  the  funds  insufficient 
to  sustain  the  great  issue  which  has  been  reared 
upon  them.  Distrust  spreads  the  demand  to  other 
banks  in  a  similar  condition,  and  the  system, 
honeycombed  by  competition,  falls  into  ruins. 
Suspension  of  banks,  stringency  of  the  money 
market,  and  a  panic  ending  in  a  depreciated  or 
worthless  paper  currency  are  the  results.  Each 
bank  endeavors  to  save  itself  at  whatever  cost  to 
its  competitors.  No  bank  is  strong  enough  to 
extend  assistance  and  command  confidence. 

Here  again  the  champions  of  the  monopoly  of 
note  issue  urge  the  advantage  of  the  power  of  a 
single  great  establishment.  Its  connection  with  the 
government  gives  it  position  and  solidity  and  in- 
creases the  effect  of  its  mere  financial  resources  in 
inspiring  that  credit  which  is  the  object  of  all  search 
in  times  of  crises.*  Then  it  is  preeminently  that  a 
great  bank  can  put  forth  its  powers,  or,  as  has 
been  the  case  in  the  history  of  the  Bank  of  Eng- 
land, reestablish  confidence  by  the  mere  prospect 
of  its  assistance. 

*  E.  Nasse, "  Ueber  die  Verhiitung  der  Productions- Krisen  durch 
staatliche  Fiirsorge,"  in  "Jahrbuch  fiir  Gesetzgebung,"  Bd.  Ill, 
N.  F.  Also  A.  Wagner,  "  Geld-  und  Credittheorie  der  Peel'schen 
Bankacle,"  p.  193  ff. 

112 


CRISES   AND    LEGISLATION 

A  considerable  school  of  French  writers  has 
held  views  opposed  to  those  we  have  just  con- 
sidered, maintaining  that  the  cause  of  economic 
crises  lies  in  the  abuse  of  power  on  the  part  of 
privileged  banks  of  issue.  It  is  held  to  be  an 
inevitable  accompaniment  of  a  privileged  bank 
under  state  control  that  there  should  be  a  political 
faction  opposed  to  it.  The  bank  is  therefore  never 
entirely  out  of  politics,  and  at  the  worst  may  be 
the  foot-ball  of  parties. 

Out  of  a  close  relation  of  a  bank  to  public 
finances  other  evils  may  arise.  If  the  government 
is  often  strengthened,  the  bank  is  as  often  weak- 
ened. The  course  of  bank-notes  becomes  subject 
to  all  the  influences  affecting  the  public  credit. 
A  privileged  bank,  owing  its  pecuHar  privileges  to 
the  state,  cannot  resist  the  demands  of  the  state  as 
can  independent  banks.  And  it  has  less  reason 
for  doing  so,  since,  if  its  resources  are  overtaxed 
and  it  finds  itself  unable  to  redeem  its  notes,  it  is 
sure  of  protection  from  the  state  in  laws  restrict- 
ing the  redemption  of  notes  or  suspending  it  en- 
tirely. As  Lord  Overstone  said,  a  private  banker, 
if  he  mismanage  affairs,  must  suffer  the  penalty 
and  be  bankrupt,  but  if  the  Bank  of  England  is 
guilty  of  mismanagement  it  can  save  itself  at  the 
expense  of  the  entire  country.^ 

The  history  of  the  Bank  of  France  and  of  the 
Bank  of  England  has  been  cited  as  proof  of  these 

*  "  Report  of  Committee  of  House  of  Commons  on  Commercial 
Distress,"  1847-48,  N.  5192. 

I  113 


ECONOMIC   CRISES 

assertions.  The  recognized  connection  existing 
between  the  government  and  the  Bank  of  France 
caused  distrust  of  the  notes  of  the  latter  when  the 
invading  armies  entered  France  in  the  winter  of 
i8 13-14.  A  legal  restriction  of  the  amount  of 
notes  that  could  be  presented  for  daily  redemption 
followed.  Similarly  in  England ;  the  war  with 
France  caused  the  government  to  make  such 
demands  upon  the  Bank  of  England  that  in  1795 
its  credit  was  impaired  and  specie  payments  were 
suspended,  not  to  be  resumed  until  1821.^ 

Again  it  is  argued  that  a  single  bank  of  issue, 
because  it  receives  very  large  deposits,  tends  to 
extend  a  note  issue  depending  upon  them  as  a 
redemption  fund.     This  issue  cheapens  the  price 

^  M.  Chevalier  says  in  reviewing  Horn's  book,  "  La  Liberie  des 
Banques,"  in  "Journal  des  Economistes,"  Vol.  Ill,  1866,  p.  357: 
"  With  an  analytical  spirit  the  distinguished  M.  Horn  has  sought  for 
the  reason  why  the  great  privileged  banks  have  been  so  often  in 
default.  He  has  stated  the  cause;  a  cause  which,  it  is  necessary 
to  say,  is  very  uniform,  and  which  one  finds  identically  the  same  in 
both  hemispheres.  That  cause  is  the  interference  of  government 
in  the  affairs  of  the  banks.  To  speak  with  greater  precision,  the 
causes  are  the  accommodations  which  governments  have  demanded 
from  the  banks,  the  great  advances  which  the  banks  have  been 
forced  to  make,  when  in  theory  a  bank  should  only  make  advances 
on  commerce.  The  privileged  banks  have  not  been  able  to  refuse 
these  accommodations,  because  of  the  very  fact  that  they  are  privi- 
leged." Cf.  Horn,  "  La  Liberte  des  Banques,"  p.,  395.  A.  Wagner, 
"  Lehre  von  den  Banken,"  p.  15,  says  that  if  the  state  always  came 
to  the  rescue  of  competing  banks  with  a  grant  of  legal-tender 
powers  in  case  of  financial  difficulty,  as  is  done  with  privileged 
banks,  it  would  not  be  difficult  for  them  in  like  manner  to  bring 
back  their  finances  to  a  state  of  order. 

114 


CRISES  AND   LEGISLATION 

of  money  and  throws  some  portion  of  private 
capital  out  of  investment.  This  flows  into  the 
vaults  of  the  banks  and  serves  in  turn  as  the  basis 
of  an  extension  of  note  issue.  The  cheapening  of 
the  price  of  money  ruins  private  banks,  and  the 
business  of  banking  becomes  more  and  more  con- 
centrated. Thus  a  process  of  displacement  goes 
on,  during  the  progress  of  which  an  enormous 
note  issue  is  built  up,  erected  upon  an  uncertain 
balance  of  deposits.  The  end  of  the  progression 
is  that  some  unexpected  turn  causes  a  heavy  draft 
upon  the  state  bank  and  at  once  precipitates  a 
financial  crisis.  Under  a  system  of  free  banking 
it  is  urged  that  these  evils  are  avoided.  Every 
attempt  to  realize  an  undue  profit  in  the  issue  of 
notes,  if  successful,  attracts  new  capital,  and  com- 
petition is  increased  until  the  same  level  of  profits 
is  reached  in  selling  money  as  can  be  secured  in 
any  other  branch  of  competitive  industry.'' 

Each  competitive  bank  has  the  check  of  redemp- 
tion thrust  constantly  upon  it  by  other  banks  en- 
deavoring to  extend  their  issues.^ 

Before  passing  from  this  subject  it  is  well  to 
recall  the  fact  that  banks  are  simply  commercial 
institutions,  subject  to  the  same  stimulating  and 

'  Coquelin,  "  Revue  des  Deux  Mondes,"  Vol.  XXIV,  1848,  pp. 
457-470.  Precisely  the  same  theory  and  explanations  are  to  be 
found  in  H.  C.  Carey's  "Credit  Systems,"  pp.  57-58  and  66. 
Coquelin  recognizes  Carey's  work,  and  commends  it  highly. 

^  Courcelle-Seneuil,  "Journal  des  Economistes,"  Vol.  XLIII,  p. 
163.  A  better  explanation  may  be  found  in  "  Report  of  the  Mone- 
tary Commission  of  the  Indianapolis  Convention,  "1898,  pp.  325-327. 


ECONOMIC   CRISES 

depressing  influences  which  play  upon  the  com- 
munity in  general.  As  Professor  Sumner  has  well 
said  in  his  "  History  of  the  American  Currency  "  : 
"  It  is  a  very  easy  method  of  explaining  mercantile 
and  industrial  movements  to  ascribe  them  entirely 
to  expansions  and  contractions  of  the  currency, 
but,  on  a  currency  even  nominally  convertible,  the 
currency  inflation  does  not  lead  off.  The  mania 
for  sudden  riches  gets  possession  of  the  com- 
munity, and  the  banks  fall  in  with,  aid,  and  stimu- 
late it.  The  blame  cannot  be  simply  thrown  upon 
the  banks  for  causing  the  trouble."  ^ 

The  second  discussion  to  which  reference  has 
been  made  is  that  carried  on  in  England  from  the 
beginning  of  this  century  down  practically  to  date, 
and  centering  in  the  Peel  Bank  Act  of  1844.^*^ 

The  English  Bullion  Committee  was  appointed 
in  18 10  to  inquire  why  there  was  a  depreciation  of 
bank-notes  during  the  "  Bank  Restriction  Period," 
when  the  Bank  of  England  did  not  redeem  its 
notes.  This  committee  maintained  that  a  suffi- 
cient regulation  to  maintain  paper  money  at  par 
with  gold  was  to  insure  its  constant  convertibility. 
As  reasonable  as  this  proposition  now  seems,  it 
was  disputed.  A  group  of  thinkers  appeared 
somewhat  later,  known  as  the  "  Currency  School," 
who  asserted  that  if   there  was  no  paper  money 

*  Sumner,  "  History  of  American  Currency,"  p.  124. 
^'^  The  text  of  this  act  is  printed  in  H.  V.  Poor's  "  Money  and  its 
Laws,"   2d  ed.,  pp.   297-298,   also   in  "The    English    Manual   of 
Banking,"  by  Arthur  Crump,  4th  ed.,  London,  1897,  pp.  286-289. 
116 


CRISES   AND    LEGISLATION 

each  country  naturally  attracted  the  amount  of 
the  precious  metals  corresponding  to  the  amount 
of  business  done  within  it.  This  ebb  and  flow  is 
the  natural  and  desirable  state  of  affairs.  To 
maintain  it  when  paper  currency  is  issued,  the 
convertibility  of  the  paper  is  not  sufficient.  There 
must  be  a  device  so  arranged  that  as  coin  is  with- 
drawn from  circulation  a  like  amount  of  paper  is 
withdrawn,  and  vice  versa.  Otherwise,  it  was 
claimed,  silver  and  gold  might  leave  a  country, 
and  paper  take  its  place  in  circulation.  Under 
such  circumstances,  prices  will  not  respond  to  the 
drain  of  precious  metals.  Not  only  will  the  proper 
relation  between  the  amount  of  the  precious  metals 
in  the  country  to  that  in  other  countries  be  dis- 
turbed, but  also  that  between  the  paper  and  the 
coin  in  circulation.  It  was  believed  that  con- 
vertible paper  could  be  so  overissued,  and  coin 
reserves  so  depleted,  that  the  final  readjustment 
to  proper  conditions  would  be  violent  and  destruc- 
tive." 

On  the  substitution  of  notes  for  gold  in  the  cur- 
rency, Pitt  said,  when  introducing  his  bill :  "  The 
difference  may  not  be  immediately  perceived  ;  nay, 
the  first  effect  of  undue  issue,  by  increasing  prices, 
may  be  to  encourage  further  issues ;  and  as  each 

^1  References  on  this  point  are  Pitt's  speech  in  Parliament; 
Tooke,  "  History  of  Prices,"  Vol.  IV,  p.  187;  Vol.  V,  pp.  507-512; 
Torrens,  "  Inquiry  into  Renewal  of  Charter  of  the  Bank  of  Eng- 
land," pp.  48-50;  James  Wilson,  "  Capital,  Currency  and  Banking," 
pp.  58,  59;  A.  Wagner,  "  Peel'schen  Bankacte,"  various  citations. 
117 


ECONOMIC   CRISES 

issuer,  when  there  is  unlimited  competition,  feels 
the  inutility  of  individual  efforts  at  contraction, 
the  evil  proceeds  until  the  disparity  between  gold 
and  paper  becomes  manifest,  confidence  in  the 
paper  is  shaken,  and  it  becomes  necessary  to 
restore  its  value  by  sudden  and  violent  reductions 
in  its  amount,  spreading  ruin  among  the  issuers  of 
paper,  and  deranging  the  whole  monetary  transac- 
tions of  the  country."  It  will  be  observed  that  this  , 
presents  a  theory  of  crises.  We  shall  not  consider 
the  fallacious  reasoning  in  regard  to  the  nature  of 
convertible  paper  money  contained  in  it,  but  will 
confine  ourselves  to  the  relation  of  this  discussion 
to  crises. 

This  theory  v/as  responsible  for  the  Peel  Bank 
Act  of  1844,  which  has  regulated  the  business  of 
the  Bank  of  England  since  the  time  of  its  passage. 
The  bank  is  divided  into  an  issue  department  and 
a  banking  department.  Notes  can  be  obtained  from 
the  issue  department  only  by  the  deposit  of  a  cor- 
responding amount  of  gold  by  the  banking  depart- 
ment with  it  to  insure  redemption.  When  the 
banking  department  is  called  upon  for  deposits, 
therefore,  it  is  obliged  to  present  notes  to  the  issue 
department  to  secure  the  gold,  thus  withdrawing 
paper  from  circulation.  This  brings  about  a  close 
correspondence  between  the  movement  of  gold 
and  notes  in  and  out  of  the  bank. 

The  effect  of  this  provision  has  simply  been  that 
during  financial  panics,  when  bank  accommodation 
is  most  anxiously  sought  for,  individual  depositors 

118 


CRISES  AND    LEGISLATION 

draw  out  their  deposits  from  the  bank  and  that 
institution  is  obliged  to  relentlessly  withdraw  its 
notes  from  circulation  pari  passu  with  the  with- 
drawal of  the  gold  from  its  vaults.  Such  an  auto- 
matic strangling  of  the  money  market  has  been 
found  intolerable.  In  1847,  within  three  years 
after  the  passage  of  the  act,  the  law  was  sus- 
pended to  permit  the  bank  to  relieve  the  strin- 
gency of  the  money  market  by  issuing  notes  upon 
securities.^2  'pj^g  relief  in  this  instance  was  imme- 
diate. In  the  stringency  of  1857  the  act  was  sus- 
pended, and  discounting  allowed  at  10  per  cent. 
At  this  time  the  permitted  issues  of  notes  but 
slightly  exceeded  the  legal  limits.  In  1866  the 
act  was  suspended  for  the  third  time,  but  the  mere 
assurance  that  notes  could  be  had  was  sufficient, 
and  no  actual  infringement  of  usual  rules  was 
found  necessary. 

CORPORATION    LAW 

The  forms  into  which  capital  is  combined  for 
the  furtherance  of  business  purposes  are  of  con- 
siderable importance  in  determining  the  tendencies 
manifested  by  business  enterprise.  These  forms, 
more  especially  corporate  forms,  are  partly  under 
the  control  of  legislation,  since  they  owe  their 
origin  to  the  grant  of  legal  powers  given  by  the 
state.  Some  of  these  forms  have  shown  them- 
selves  to   be  fitted   for  certain  classes  of   under- 

^2  An  Austrian  copy  of  Peel's  act  underwent  the  same  fate. 
119 


ECONOMIC   CRISES 

takings  only,  and  through  some  of  them  the  spirit 
of  overspeculation  and  dishonesty  has  been  able 
to  work  itself  out  much  more  easily  than  through 
others.^^ 

The  study  of  the  organization  of  joint  stock 
companies  has  been  introduced  into  the  literature 
of  crises  chiefly  through  the  experiences  of  Ger- 
many and  Austria  after  the  close  of  the  war  of 
1870-71,  culminating  in  the  so-called  "Vienna 
crash"  of  1873."  In  Germany,  by  the  middle  of 
1870  there  were  410  joint  stock  companies  having 
a  capital  of  3,o78,ooo,cxx)  marks.  In  the  four  years 
following,  857  new  companies  were  organized  with 
a  capital  of  4,290,000,000  marks.  That  the  growth 
was  abnormal  was  amply  shown  by  the  insolvencies 
of  the  following  years.  Attention  was  thereby 
drawn  to  the  laws  controlling  joint  stock  business. 
The  United  States  has  suffered  from  unsound  and 
unscrupulous  methods  in  the  organization  and  con- 
trol of  corporations,  and  has  had  this  as  a  contribu- 
tary  cause  of  economic  crises.^^ 

^8  The  juristic  person  is  now  too  often  used  as  the  "  persona  " 
once  was  in  Rome  —  as  a  mask  to  hide  the  true  actors.  Corpora- 
tion methods  would  in  many  cases  be  immediately  recognized  as 
infamous  if  they  were  merely  transferred  to  the  sphere  of  private 
actions  and  relations.  Cf.  Report  of  Eleventh  "  Kongress  deutscher 
Volkswirthe,"  1869. 

^*  The  principal  writers  who  have  contributed  to  the  discussion 
are  Wagner,  Schaffle,  Wiener,  Oechelhauser,  Kleinwachter,  and 
Emminghaus. 

1^  For  an  excellent  concise  enumeration  of  the  advantages  and 
disadvantages  of  the  joint  stock  form  see  Schaffle  in  "Tiibinger 

120 


CRISES  AND    L.EGISLATION 

The  system  of  granting  charters  by  special  legis- 
lative enactment  which  prevailed  in  Germany  dur- 
ing the  period  mentioned  has  always  shown  itself 
to  be  inadequate,  open  to  favoritism,  and  without 
proper  uniformity  in  its  operation.  Experience 
has  shown  the  wisdom  of  comprehensive  legisla- 
tive enactments  under  which  companies  are  to 
be  organized.  Such  laws  may  restrict  the  joint 
stock  form  to  those  businesses  in  which  experience 
has  proven  it  to  be  useful,  and  may  provide  those 
peculiar  safeguards  necessary  for  each  grand  divi- 
sion of  corporations,  dividing  them  according  to 
the  characteristics  displayed  by  them  when  in 
operation. 

As  far  as  possible  speculative  incorporations 
designed  to  exploit  the  investing  market  by  the 
sale  of  stock  should  be  discouraged.  Any  profit 
which  may  arise  to  any  one  from  the  mere  process 
of  founding  and  financing  a  company  should  be 
clearly  understood  and  formally  stipulated  between 
those  who  organize  a  company  and  those  who 
invest  their  money  in  it.  As  far  as  possible,  re- 
muneration for  valuable  knowledge,  inventions, 
or  other  services,  when  made  to  the  organizers, 
should  be  in  a  form  to  attach  the  interest  of  the 
recipients  to  the  permanent  success  of  the  busi- 
ness.    This  may  be  done  by  means  of  royalties. 

Zeitschrift,"  1869,  pp.  336-338.  Cf.  Conrad's  "  Lectures,"  3d  ed. 
(privately  printed),  pp.  67-68;  Rogers,  "  Industrial  and  Commer- 
cial History  of  England,"  Series  I,  Ch.  VII;  Roscher,  "  Nationald- 
konomik  des  Handels  und  Gewerbfleisses,"  2  Aufl.,  Sees.  28,  29,  30. 

121 


ECONOMIC   CRISES 

In  general  the  interests  of  organizers  should  be 
compelled  to  depend  upon  the  prospects  of  legiti- 
mate and  continuous  business. 

The  management  of  corporations  seems  to  show 
that  a  continuous  and  active  control  of  a  corpora- 
tion by  its  stockholders,  if  they  are  more  numerous 
than  can  get  their  heads  together  in  a  private  office 
or  around  a  consultation  table,  is  difficult  to  put  in 
operation.  Because  of  this  difficulty  the  sphere  of 
corporate  business,  unless  under  special  state  super- 
vision, appears  to  be  those  businesses  which  require 
a  large  proportion  of  fixed  capital  and  in  which  the 
management,  when  once  inaugurated,  is  largely 
automatic. ^^ 

So  far  as  the  principles  governing  corporate  busi- 
ness permit  of  being  expressed  in  a  few  words,  the 
evils  of  mismanagement  appear  to  originate  from 
abandoning  in  a  greater  or  less  degree  the  demo- 
cratic principle.  The  concentration  of  great  dis- 
cretionary power  in  the  hands  of  directors,  without 
an  easy  means  of  appeal  and  investigation  open 
to  the  stockholders,  diminishes  the  feeling  of 
accountability  in  the  former  and  of  interest  in 
the  latter.  Manipulations  upon  the  stock  market 
to  drive  the  smaller  stockholders  to  sell  are  natu- 
ral when  a  bare  majority  of  stock  gives  control. 
It  may  be  suggested  that  the  voting  power  of 
shares  should  be  decreased  in  proportion  to  their 
concentration  in  a  few  hands.     A  maximum  of  the 

"  Adam  Smith's  "  Wealth  of  Nations,"  Bk.  V,  Ch.  I,  Part  III, 
Art.  I,  Sees.  36,  51-59. 

122 


CRISES  AND   LEGISLATION 

votes  to  be  cast  by  one  person  may  be  specified. ^'^ 
A  time  should  be  stipulated  within  which  share- 
holders shall  meet  to  elect  directors,  after  organi- 
zation. It  may  be  found  advisable  to  adopt  a 
plan  of  minority  representation  on  the  board  of 
directors. 

Many  American  railway  corporations  have  se- 
cured the  greater  part  of  the  money  with  which 
their  roads  were  built  from  bonds. ^^  As  the  voting 
power  is  restricted  to  stock,  such  companies  have 
been  in  the  hands  of  a  few  "insiders."  These 
corporations  are  miscreations,  due  to  the  fact  that 
legislatures  have  allowed  stock  to  be  issued  for  a 
merely  nominal  cash  payment  and  have  given  un- 
limited borrowing  power.      The  borrowing  power 

1''  The  distribution  of  the  voting  power  in  the  First  and  Second 
Bank  of  the  United  States  was  as  follows : 
For  every  one  or  two  shares 
For  every  additional  two  shares  up  to  lo 
For  every  additional  four  shares  from  lo  to  30 
For  every  additional  six  shares  from  30  to  60 
For  every  additional  eight  shares  from  60  to  100 
For  every  additional  ten  shares  from  100  up 
No  person,  copartnership,  or  body  politic  to  hav< 
thirty  votes. 

First  Charter  I,  Sec.  7,  Second  Charter  I,  Sec.  1 1 . 
^*  See  Von  der  Leyen,  "  Die  Finanz-  und  Verkehrspolitik  der 
Nordamerikanischen  Eisenbahnen "  in  "  Archiv  fiir  Eisenbahn- 
wesen"  (published  by  the  Prussian  Department  of  Public  Works), 
Heft  I,  1894,  especially  the  heading  "Die  Griindung  einer  Ameri- 
kanischen  Eisenbahn."  See  also  Van  Oss,  "American  Railroads 
as  Investments"  (New  York,  1893),  p.  56.  Upon  the  abuse  of 
joint  stock  business  forms  in  relation  to  crises  see  A.  Wagner, 
"Kiisen,"  in  Rentzsch's  "  Handworterbuch,"  p.  531. 
123 


I  vote 

.     I  vote 

.     I  vote 

.     I  vote 

.     I  vote 

.      I  vote 

'e  more   than 

ECONOMIC   CRISES 

of  a  corporation  should  be  limited  to  a  certain 
fraction  of  the  capital  actually  paid  in.  No  com- 
pany should  be  allowed  to  purchase  its  own  shares, 
or  sell  them  at  a  discount.^^  The  issue  of  stock 
dividends  should  be  forbidden  and  also  of  divi- 
dends drawn  from  capital.  The  financial  atmos- 
phere would  be  greatly  cleared,  and  the  secret 
machinations  of  schemers  which  so  disquiet  trade 
and  discourage  honest  industry  would  be  largely 
stopped,  were  a  public  record  required  with  the 
register  of  deeds  for  each  purchase  or  transfer 
of  corporation  shares.  Finally  the  laws  govern- 
ing corporate  business  may  define  the  manner  in 
which  the  assets  of  a  company  are  to  be  reached 
for  the  payment  of  its  debts  through  the  machinery 
of  bankruptcy  law. 

BANKRUPTCY 

This  brings  us  to  the  subject  of  bankruptcy,  in 
regard  to  which  a  few  points  may  be  noticed.  It 
is  obvious  that  a  very  considerable  influence  must 
be  exerted  upon  the  general  course  of  business  by 
those  regulations  which  determine  what  shall  be 
done  when  a  person's  assets  are  not  equal  to  his 
liabilities.  The  character  of  a  bankruptcy  law  will 
determine  in  some  degree  how  severely  the  effects 

^^  The  lack  of  a  provision  to  this  effect  in  French  law  led  to  the 
manipulations  on  the  stock  market  carried  on  by  the  "  Union 
Generale."  This  was  shortly  followed  by  its  failure  in  1882,  pre- 
cipitating a  severe  financial  crisis,  one  of  the  few  to  which  France 
has  been  subjected. 

124 


CRISES  AND   LEGISLATION 

of  an  economic  crisis  are  felt  by  those  immediately 
concerned  in  bringing  it  about.  Through  its  pro- 
visions there  will  be  expressed  the  attitude  of  trade 
toward  such  practices  as  are  supposed  to  lead  up 
to  crises. 

It  is  desirable  that  a  sharp  distinction  should  be 
drawn  between  the  laws  used  to  enforce  the  pay- 
ment of  ordinary  debts  and  those  used  in  set- 
tling commercial  indebtedness.  There  are  debtors 
whose  business  necessarily  involves  them  in  the 
credit  mechanism  of  trade  to  such  an  extent  that 
their  solvency  depends  not  alone  upon  their  busi- 
ness and  moral  characteristics,  as  in  the  case 
of  farmers,  wage-earners,  and  professional  men. 
There  are  many  businesses  the  solvency  of  which 
depends  in  a  very  important  degree  upon  the  gen- 
eral course  of  trade  and  the  occurrence  and  dura- 
tion of  credit  storms  ;  in  short,  upon  circumstances 
beyond  the  control  of  their  managers.  For  the 
insolvent  commercial  creditor  special  provisions 
are  therefore  justifiable. 

In  its  action  a  bankruptcy  proceeding  may  be 
likened  to  a  crisis.  Insolvency  with  bankruptcy  is 
indeed  a  crisis  for  one  business,  while  a  general 
crisis  is  the  simultaneous  occurrence  of  many  in- 
solvencies. The  scramble  for  liquidation  which 
marks  the  crisis  is  analogous  to  the  "race  of  dili- 
gence "  among  creditors,  which  is  set  up  when  a 
suspicion  of  embarrassment  attaches  to  a  debtor. 
Bankruptcy,  like  a  crisis,  may  be  a  healthy  check 
and  restorative,  when  applied  at  an  early  stage. 
125 


ECONOMIC   CRISES 

But  either,  when  delayed,  may  be  a  dreaded  cut- 
ting down  to  actual  conditions. 

The  aims  which  should  control  legislation  upon 
bankruptcy  may  be  stated  to  be,  as  regards  the 
creditor,  a  just,  speedy,  and  economical  distribu- 
tion of  the  debtor's  property;  as  regards  the 
debtor,  either  to  restore  him  as  far  as  possible 
to  an  independent  position  or  to  administer  pun- 
ishment for  neglect  and  fraud,  as  the  facts  may 
indicate.  Sometimes  one  of  these  aims,  sometimes 
the  other,  has  been  the  dominant  one  in  legisla- 
tion. If  a  state  of  insolvency  is  considered  chiefly 
as  due  to  misfortune,  the  most  fair  and  economical 
method  of  clearing  the  score  and  giving  the  debtor 
a  new  chance  in  business  is  the  thing  desired.  If, 
on  the  other  hand,  a  suspicion  of  negligence  or 
dishonesty  usually  attaches  to  insolvency,  a  fair 
trial,  with  suitable  provision  for  punishment,  should 
be  the  main  aim.  Undoubtedly  there  is  room  for 
both  these  points  of  view  in  the  correct  concep- 
tion. The  problem  is  to  preserve  the  proper  bal- 
ance between  them.  On  the  one  hand,  undeserved 
hardship  to  debtors  must  be  reduced  to  the  small- 
est possible  minimum.  On  the  other  hand,  the 
influence  of  bankruptcy  legislation  upon  business 
morality  must  not  be  forgotten. 

The  most  important  aim  of  bankruptcy  legisla- 
tion is  to  discourage  insolvency.  But  it  is  not 
the  most  severe  legislation  which  always  has  the 
desired  repressive  effect,  as  the  entire  history  of 
criminal  law  proves.     Beccaria  points  out  in  his 

126 


CRISES  AND   LEGISLATION 

great  work,  "  Crime  and  Punishment,"  that  a  law 
which  is  too  severe  revolts  the  mind,  and  becomes 
a  dead  letter.  This  principle  applies  to  the  case 
in  hand.  Business  men  or  firms  maintaining  nu- 
merous commercial  connections  will  not  employ 
bankruptcy  proceedings  when  to  do  so  creates  a 
very  general  prejudice  against  them  in  the  busi- 
ness community.  The  effect  of  great  severity  in 
legislation  is  similar  to  an  error  on  the  side  of 
undue  liberality. 

A  law  which  is  too  favorable  to  the  debtor  may 
be  used  as  a  menace  by  him  in  dealing  with 
creditors  to  compel  further  advances  and  secure 
a  continuation  of  unsound  methods  of  doing  busi- 
ness. The  trouble  with  the  state  banks  of  issue 
in  the  United  States  between  1812  and  18 18  arose 
partly  from  a  wretchedly  loose  practice  with  refer- 
ence to  bankruptcy.  An  ever  ready  way  of  retreat 
was  open  for  dishonest  bankers,  a  fact  which 
undermined  commercial  morality. 

We  ought  by  no  means  to  overlook  those  con- 
ditions of  modern  business  which  render  it  impos- 
sible, at  certain  times,  for  even  conservative 
businesses  to  maintain  their  solvency.  While  the 
bankruptcies  of  certain  periods  indicate  a  general 
breakdown  of  the  industrial  system  rather  than 
individual  dishonesty,  nevertheless  no  contrivance 
should  be  set  in  operation,  through  the  provisions 
of  bankruptcy,  which  removes  from  the  abuser  of 
credit  the  force  of  the  law,  "  The  way  of  the  trans- 
gressor is  hard."  The  counterfeiter,  by  his  dis- 
127 


ECONOMIC   CRISES 

honesty,  throws  doubt  upon  the  authenticity  of  the 
coin  of  the  country,  but  the  man  who  abuses  credit 
injures  that  which  facilitates  business  even  more 
than  coin  in  the  trade  of  the  modern  world.  The 
counterfeiter  of  coin  puts  an  expense  upon  all  who 
deal  in  coin,  the  abuser  of  credit  injures  all  who 
are  affected  when  trade  abandons  any  measure 
of  the  economy  and  convenience  of  credit.  If  the 
condition  of  credit  was  once  a  private  matter,  while 
the  issue  of  coin  was  a  public  affair,  those  times 
have  passed,  for  both  are  now  equally  matters  of 
public  concern. 

In  the  construction  of  a  law  of  bankruptcy  it 
seems  to  be  wise  to  permit  both  voluntary  and 
involuntary  proceedings,  that  is,  to  permit  applica- 
tion to  be  made  either  by  the  debtor  or  by  his 
creditors.  In  connection  with  crises  the  determina- 
tion of  what  shall  prevent  the  discharge  of  an  in- 
solvent person  is  a  most  important  point.  The 
principal  hindrances  to  discharge  in  France  are  ex- 
travagance in  personal  or  household  expenses,  spec- 
ulation upon  the  stock  market,  the  adoption  of  ruin- 
ous methods  to  delay  bankruptcy,  or  the  attempt 
to  favor  any  creditor  unduly.  In  England,  in  addi- 
tion to  other  impediments,  no  insolvent  person  can 
be  discharged  whose  estate  does  not  amount  to 
fifty  per  cent  of  his  liabilities.  According  to  the 
United  States  law  of  1867,  evidences  of  fraud,  or 
fraudulent  gifts  or  conveyances,  were  a  bar  to 
discharge,  also  losses  through  gaming  and  the 
failure  to  keep  proper  books.  If  an  estate  did  not 
128 


CRISES   AND    LEGISLATION 

yield  thirty  per  cent,  the  concurrence  of  a  majority 
of  the  creditors,  both  as  to  number  and  the  value 
of  claims,  was  required  to  secure  discharge.  In 
second  bankruptcy  the  minimum  necessary  for 
discharge  was  placed  at  seventy  per  cent.  The 
Act  of  1898  provides  that  the  commitment  of  acts 
punishable  by  imprisonment  under  the  bankruptcy 
law  and  the  failure  to  keep  books,  or  the  destroy- 
ing or  removing  of  the  same  to  conceal  material 
facts,  shall  bar  discharge. 

CONCLUSION 

In  conclusion  it  may  be  said  that  the  task  of  the 
state  in  enacting  wise  laws  to  regulate  economic 
interests  is  becoming  continually  more  important 
and  more  difficult  of  performance.  This  means 
that  more  ability  is  being  required  of  legislators. 
In  view  of  this  it  is  not  encouraging  to  contem- 
plate the  types  of  men  being  returned  to  the  vari- 
ous state  legislatures  of  this  country  nor  even  the 
types  in  Congress.  The  indirect  and  unexpected 
effects  of  legislation  have  so  often  afforded  a 
severe  surprise  to  the  interests  affected  by  them 
that  it  is  time  the  lesson  should  be  learned  and 
these  matters  be  made  the  subject  of  careful  and 
complete  study  prior  to  legislative  action.  It  is 
an  encouraging  sign  that  elaborate  legislative  in- 
vestigations are  becoming  the  rule  in  this  country, 
as  they  have  long  been  in  England. 


129 


ECONOMIC   CRISES 


RESUME 


The  importance  of  legislative  enactments  not  to  be  over- 
estimated. 
I.    Monetary  legislation. 

Essentials  of  an  ideal  monetary  system. 
II.    Banks  —  their  relation  to  crises. 
(a)    General  considerations. 
Functions  of  a  bank. 
Care  in  granting  charters. 
Examinations  and  publication  of  statements. 
Duties  of  directors. 
Control  through  clearing-houses. 
(d)    Should  competition  be  permitted  in  the  issue  of 

bank-notes  ? 
(c)    Peel  Bank  Act  of  1844. 

III.  Corporation  Law —  abuse  of  corporate  privileges. 

Restriction  of  privilege  of  incorporation. 
Speculative  incorporations  to  be  discouraged. 
Financial  claims  of  organizers  to  be  made  definite. 
Royalties. 

Control  by  stockholders. 

The     democratic     principle  —  distribution   of   voting 
power. 

IV.  Bankruptcy. 

Two  motives  :  — 

To  discharge  the  honest  debtor. 

To  punish  the  dishonest  insolvent. 
Citation  of  impediments  to  the  discharge  of  debtors. 


130 


CHAPTER   VII 

THE   PERIODICITY   OF  CRISES 

If  we  consider  the  long  series  of  crises  which 
have  marked  the  progress  of  industry,  from  the 
time  when  crises  first  began  seriously  to  attract 
the  attention  of  economic  writers  in  the  latter 
part  of  the  eighteenth  century  down  to  the  pres- 
ent, it  can  scarcely  escape  the  observation  of  any 
person  that  these  events  have  been  distributed 
chronologically  with  a  certain  uniformity  of  inter- 
val. In  the  economic  life  of  Western  Europe  and 
the  United  States  the  coming  of  a  crisis  has  never 
been  very  long  delayed  nor  have  full-fledged 
crises  of  the  first  degree  of  intensity  been  at 
any  time  developed  within  at  least  six  or  eight 
years  of  one  another.  This  general  tendency  to 
an  evenness  of  spacing  between  crises  has  sug- 
gested to  some  students  of  the  subject  that  there 
must  be  a  law  in  the  recurrence  of  these  phenom- 
ena, tending  to  estabhsh  a  definite  periodicity.  If 
such  a  law  could  be  discovered  and  its  nature 
explained,  it  would  of  course  throw  light  directly 
upon  the  causes  of  crises. 

To   grant   that   a    phenomenon    is    of   periodic 
occurrence   does   not  necessarily   imply  that   the 
131 


ECONOMIC   CRISES 

force  which  causes  it  is  spasmodic  or  lacking  in 
continuity.  A  regularly  operating  force,  when  at 
a  certain  point  its  cumulated  effects  disturb  the 
equilibrium  under  which  the  force  has  up  to  that 
time  operated,  may  manifest  itself  only  periodically 
in  certain  of  its  aspects.  The  simplest  illustra- 
tions of  this  are  the  intermittent  spring  and  the 
geyser.  We  know  that  muscular  and  nervous 
activity  is  intermittent  in  character.  Periodicity 
has  been  declared  to  be  a  fundamental  character- 
istic of  all  individual  physical  and  intellectual 
activities  of  human  beings.  But  it  does  not  neces- 
sarily follow  from  this  that  all  social  phenomena 
are  periodic  or  even  intermittent.  Social  activities 
may  be  sustained  continuously  by  a  group  of  indi- 
viduals, a  part  of  whom  are  continually  being 
replaced  by  others.  The  argument  concerning 
physical  or  nervous  exhaustion  as  derived  from  the 
study  of  the  individual,  cannot  without  further 
proof  be  applied  to  all  classes  of  social  action. 
The  work  of  a  factory  may  continue  uninter- 
ruptedly while  the  individuals  connected  with  it 
are  regularly  replaced  before  exhaustion  incapaci- 
tates any  one  from  rendering  service. 

While,  therefore,  social  forces  are  capable  of  a 
continuity  of  which  individual  activities  are  not, 
nothing  is  of  more  common  observation  than  that 
in  the  irregular  and  intermittent  character  of  their 
life  history  social  movements  continually  remind 
us  of  individual  activities.  There  is  clearly  enough 
a  periodicity  of  economic  phenomena  resting  upon 
132 


THE   PERIODICITY   OF   CRISES 

the  succession  of  the  seasons.  The  spring  is  the 
season  for  plans,  the  summer  for  activity  in  carry- 
ing them  out,  the  fall  for  settlement  and  liquida- 
tion, the  winter  for  the  conservative  discharge  of 
merely  necessary  economic  functions.  Every 
season  has  a  character  of  its  own. 

But  there  are  other  periodic  social  phenomena 
which  appear  to  indicate  certain  peculiarities  in 
the  social  psychology.  It  has  been  noticed  that 
movements  for  reform  in  municipal  affairs  in  cer- 
tain American  municipalities  have  been  not  only 
spasmodic  but  regularly  recurrent. 

If  one  may  venture  upon  a  theory  to  explain 
this,  it  may  perhaps  be  said  that  the  steadily  oper- 
ating force  is  the  self-interest  of  those  in  politics 
"for  what  there  is  in  it,"  and  that  the  progressive 
exhibition  of  this  self-interest  at  length  exhausts 
the  patience  of  the  citizens  and  leads  to  the  pre- 
cipitation of  a  crisis  in  municipal  affairs.  But  the 
reform  spirit  not  having  the  enduring  power  of 
the  motive  of  self-interest  soon  dies  out  and  a 
new  cycle  is  entered   upon. 

It  has  been  noticed  that  the  movement  of  settle- 
ment westward  across  the  American  continent  has 
not  been  continuous,  but  has  been  accompHshed  by 
a  succession  of  waves  of  population  moving  on  to 
new  territory.  As  Professor  F.  W.  Taussig  has 
said :  "  The  process  of  settling  the  country  and 
taking  up  the  new  lands  of  the  United  States  has 
never  taken  place  by  regular  and  steady  steps.  It 
has  taken  place  by  spells  of  great  activity  .  .  .  fol- 

133 


ECONOMIC   CRISES 

lowed  by  periods  of  dulness  and  reaction,  in  which 
the  advance  for  the  time  being  has  almost  ceased. 
At  intervals  of  ten  years,  more  or  less,  the  popu- 
lation has  gone  west  too  fast,  and  then  has  waited 
to  recover  and  take  breath  for  a  new  effort."  ^ 

In  many  kinds  of  social  activity  it  appears  to  be 
necessary  that  a  certain  lapse  of  time  should  occur 
between  the  application  of  any  given  stimuli  in 
order  that  there  shall  be  a  strong  social  reaction 
to  them.  The  lapse  of  time  between  presidential 
elections  in  the  United  States  refreshes  the  public 
thought  and  results  in  an  intensity  of  interest  in 
these  political  contests  which  is  probably  some 
function  of  the  interval.  The  patriotic  enthusiasm 
exhibited  by  the  American  people  in  the  recent 
war  was  in  part  due  to  the  slumber  of  these 
sentiments  for  thirty-five  years. 

In  the  sense  above  indicated  the  crisis  is  an 
intermittent  phenomenon.  Many  writers  have 
gone  further  than  this,  however,  and  claimed  for 
crises  a  periodic  law.  The  literature  of  the  sub- 
ject shows  that  the  manner  in  which  a  writer 
explains  crises  has  controlling  weight  in  determin- 
ing whether  he  is  able  to  see  evidences  of  perio- 
dicity in  the  string  of  crises  or  not.  As  the  idea 
of  periodicity  accommodates  itself  in  a  remark- 
able way  to  most  theories  of  crises,  its  recognition 
is  quite  general.     The  first  to  remark  upon    the 

^"The  Silver  Situation  in  the  United  States,"  publication  of 
American  Economic  Association,  Vol.  VII,  p.  104. 


THE    PERIODICITY   OF   CRISES 

periodicity  of  crises  was  probably  Sir  William 
Petty.  Walter  Stanley  Jevons,  the  English  econo- 
mist, made  this  the  foundation  stone  of  his  expla- 
nation of  crises,  and  Bagehot,  Hke  Jevons,  admits 
periodicity,  urging  that  it  is  due  to  the  influence  of 
fluctuations  in  harvests  upon  the  financial  market. 
The  same  view  is  held  by  the  Italian  economist, 
Boccardo.2  The  socialist  writers  who  consider  the 
crisis  as  an  outcome  of  the  individualistic  character 
of  present  production  on  the  one  hand,  and  of  an 
unjust  distribution  of  wealth  on  the  other,  which 
cuts  off  the  buying  power  of  the  consumers  as  it 
increases  the  products  depending  on  their  demand, 
believe  that  crises  will  be  periodic  until  the  present 
industrial  system  is  fundamentally  changed.  Such 
views  are  found  in  the  writings  of  Marx,  Rodber- 
tus,  Friedrich  Engels,  and  others.  Writers  like 
Wagner  and  Schaffle,  who  consider  crises  as  due 
to  the  erection  of  a  vast  business  structure  upon 
a  credit  basis,  consider  the  period  of  crises  to 
depend  upon  the  psychology  of  credit,  and  the 
length  of  time  required  to  fabricate  an  overgrown 
credit  industry.  John  Stuart  Mill,  in  his  theory  of 
the  tendency  of  profits  to  a  minimum,  puts  forth  a 
theory  of  crises  which  leads  necessarily  to  the 
admission  that  their  occurrence  is  periodic.  He 
also  said  that  the  recurrence  of  crises  might  be 
due  to  the  growth  of  certain  tendencies  of  mind. 
Other  exponents  of  the  periodicity  of  crises  who 

2  "  Economia  Politica,"  6th  ed.,  Vol.  II,  Part  XXXV,  p.  156. 
135 


ECONOMIC   CRISES 

agree  in  recognizing  the  fact,  but  differ  in  their 
explanations  of  its  cause  are  Loehnis,  Fregier, 
Juglar,  and  John  Mills. 

That  there  is  any  evidence  of  periodicity  has, 
however,  been  quite  as  distinctly  denied  by  some 
writers  as  it  has  been  affirmed  by  others.  Roscher, 
recognizing  as  he  does  a  great  variety  of  causes  of 
crises,  considers  the  idea  of  periodicity  unscientific. 
Emile  de  Laveleye  denies  the  periodicity  of  crises.^ 
Mr.  M.  L.  Scudder,  Jr.,  in  his  "Congested  Prices," 
tells  us  that  the  entire  discussion  of  periodicity  is 
due  to  a  general  tendency  of  the  minds  of  investi- 
gators toward  well-rounded  and  neatly  subdivided 
portions  of  any  study  which  group  the  facts 
into  easily  comprehended  and,  apparently,  final 
relations. 

The  best  course,  probably,  is  simply  to  set  down 
the  years  of  crises  for  the  chief  industrial  states  of 
the  world,  leaving  to  the  reader  to  pass  judgment 
on  the  evidence.  But  even  the  compiling  of  a  list 
of  crises  is  a  difficult  undertaking,  since  no  precise 
line  of  demarkation  can  be  drawn  between  general 
and  partial  crises,  or  between  crises  and  other 
types  of  price  fluctuation. 

8  E.  de  Laveleye,  who  is  thoroughly  familiar  with  the  economic 
history  of  England  as  well  as  of  France,  says :  "  Crises  return  often, 
since  the  causes  which  produce  them  tend,  as  we  have  shown,  to 
appear  more  and  more  frequently.  But,  as  we  have  pointed  out  in 
our  study,  each  crisis  has  its  own  peculiar  determining  causes, 
and  does  not  result  in  a  necessary  manner  from  the  periodic  return 
of  certain  circumstances."  —  "La  Marche  Monetaire,"  Annexes 
XI,  "  De  la  Periodicite  des  Crises,"  p.  290. 
136 


THE   PERIODICITY   OF   CRISES 


List  of  Economic  Crises 


United  States 

England 

France 



1792-93 



— 

1796 

— 

— 

— 

1804 

■  — 

1810-II 

— 

I8l2 

— 

— 

— 

— 

1813 

— 

1815 

— 

1818 

— 

1818 

1825 

1825 

1825 

— 

— 

1830 

1837-39 

1836-39 

1836-39 

1847 

1847 

1847 

— 

— 

185s 

1857 

1857 

1857 

— 

1866 

— 

1869 

— 

— 

1873 

1873 

1873 

— 

— 

1882 

1884 

— 

1884-85 

1890 

1890 

1890 

1893 

— 

1893 

In  this  list  there  are  embraced  economic  disturb- 
ances of  heterogeneous  character,  such  as  have 
passed  under  the  names  of  panics,  or  crises.  There 
are  included :  crises  due  to  failure  of  harvests 
(England,  1847);  purely  financial  panics  (United 
States,  1869);  and  disturbances  originating  in  a 
single    line    of    trade   (England,    1836-39).      The 

137 


ECONOMIC   CRISES 

French  list,  which  inckides  the  crises  enumerated 
by  Jiiglar,*  embraces  a  number  of  dates  on  which 
there  was  merely  a  trade  depression,  or  a  financial 
stringency  of  more  or  less  consequence. 

In  regard  to  the  periodicity  of  crises,  we  have 
two  principal  theories  to  consider.  It  has  been 
pointed  out  by  those  who  are  familiar  with  the 
part  which  the  use  of  credit  has  played  in  bringing 
about  certain  crises,  that  crises  in  general  must 
stand  as  far  apart  as  the  period  required  to  build 
up  a  credit  structure.  If  the  attractions  of  credit 
which  lead  to  its  use,  lead  ultimately  to  its  abuse, 
time  must  be  given  for  this  force  to  build  up  an 
overtowering  structure,  the  destruction  of  which 
is  the  crisis.  After  the  reverses  of  a  crisis  have 
warned  the  community  of  the  dangers  of  unsound 
business,  a  stated  lapse  of  time  is  required  for 
business  men  to  make  the  intellectual  change 
necessary  before  the  practices  which  lead  to  crises 
can  again  become  common.  Time  is  required  to 
forget  and  to  let  hope  gradually  rise  again,  and 
the  mind  become  busied  in  plans  in  which  hope 
changes  to  confidence,  and  this  as  gradually  blos- 
soms into  rashness.  The  period  of  crisis  will  then 
be  set,  as  J.  S.  Mill  suggested,  by  certain  peculiar- 
ities of  the  human  mind,  or  as  Wagner  expresses 

*  The  list  given  in  the  text  may  be  found  in  Juglar,  "  Des  Crises 
Commerciales,"  p.  141.  Juglar  states  that  for  the  most  part  crises 
in  France  have  fallen  upon  the  same  years  as  in  England.  Cf. 
"Crises  Commerciales,"  in  Say's  "  Nouveau  Dictionnaire  d'Econo- 
mie  Politique,"  Tome  I,  Sec.  i. 


THE   PERIODICITY   OF   CRISES 

it,  by  psychological  law,  in  which  an  organic  defect 
of  human  nature  is  betrayed. 

In  the  completion  of  this  theory  a  suggestion 
originating  from  another  quarter  may  be  added. 
It  has  been  maintained  that  the  periodicity  of 
crises  rests  upon  the  procession  of  economic  gen- 
erations. The  replacing  of  an  older  generation  by 
a  younger  is  continually  going  on  in  the  business 
world,  as  elsewhere.  It  is  held  that  in  ten  years 
after  some  trying  experience  the  change  in  the 
personnel  of  business  leaders  will  have  been  so 
great  that  the  new  men  will  be  influential  enough 
to  permit  a  reappearance  of  dangerous  practices 
such  as  the  experienced  generation,  partly  sup- 
planted, would  not  tolerate.  This  view  does  not 
imply  that  a  new  generation  entirely  replaces  the 
old  one  every  ten  years ;  still  less  does  it  mean 
that  at  any  particular  time  there  is  any  unusual 
replacing  of  one  generation  by  another.  It  simply 
asserts  that  in  ten  years  not  only  will  the  keenness 
of  the  lesson  of  crises  be  somewhat  dulled  to  those 
who  have  passed  through  the  experience,  but  that 
the  new  leaders,  untamed  by  this  chastisement,  will 
be  so  large  a  faction  as  to  exert  material  influence 
in  permitting  dangerous  practices  to  be  adopted.^ 

A  theory  of  crises,  the  foundation  stone  of  which 
is  the  recognition  of  periodicity,  is  the  "  sun-spot 
and   harvest"  theory  of   Walter  Stanley  Jevons. 

6Cf.  "The  Nation,"  September  25,  1873,  Vol.  XVII,  p.  207, 
and  J.  E.  T.  Rogers's  article  "  Causes  of  Commercial  Depression," 
"  Princeton  Review,"  Vol.  Ill,  N.  S.,  p.  223. 

139 


ECONOMIC   CRISES 

As  its  name  indicates,  the  theory  is  devoted  to  an 
investigation  of  the  relation  between  sun-spots, 
harvests,  and  economic  crises.  The  idea  was 
suggested  by  the  striking  coincidence  in  length  of 
the  period  between  the  Enghsh  crises  of  1837, 
1847,  1857,  1866,  and  1878  and  the  periodic  varia- 
tion in  the  frequence  of  sun-spots. 

To  ascertain  what  causal  relation,  if  any,  existed 
between  these  two  sets  of  phenomena,  Mr.  Jevons, 
in  1862,  undertook  a  series  of  investigations.  He 
began  with  the  study  of  certain  annual  trade  fluc- 
tuations. The  first  to  attract  his  attention  was  the 
influence  of  the  "quarter-day,"  at  which  time  in 
England  it  is  customary  to  settle  accounts,  pay 
rents,  etc.  Having  calculated  from  the  records  of 
the  Bank  of  England  the  effect  of  these  settlement 
days,  and  taking  the  year  as  the  period  of  study, 
a  remarkably  persistent  set  of  annual  fluctuations 
in  the  accounts  of  the  bank  was  discovered,  show- 
ing a  distinct  autumnal  pressure  upon  the  money 
market  and  the  institutions  of  credit  generally.  In 
the  fall  of  the  year  a  considerable  amount  of  money 
is  paid  out  for  harvest  labor  and  in  the  purchase 
of  harvests^  and  the  settlement  of  country  and  vil- 
lage accounts.  This  money  is  more  than  usually 
distributed  into  the  hands  of  the  people  and  hence 

^  Jevons,  "  Currency  and  Finance,"  pp.  I-I2.  The  purchase  and 
moving  of  American  harvests  has  been  found  a  matter  of  impor- 
tance in  the  history  of  American  currency  and  banking.  See 
Taussig,  "The  Silver  Situation,"  pp.  14,  23,  67,  68,  89;  also  Sum- 
ner, "  History  of  American  Currency,"  pp.  217,  218,  219. 
140 


THE   PERIODICITY   OF  CRISES 

abstracted  from  the  banks.  Expenditures  previ- 
ously made  in  travel  or  for  building  have  not  yet 
returned  to  the  banks,  and  the  purchase  of  winter 
stocks  requires  money.  The  fall  quarter-day  is 
therefore  an  important  date,  for  at  that  time  rent 
and  dividend  payments  at  other  times  left  on 
deposit  are  drawn  from  the  banks  for  various  uses. 
If  at  such  a  period  as  this  the  banks  are  not  in 
excellent  condition,  or  if  for  any  reason  an  unusu- 
ally large  demand  is  made  for  bank  accommoda- 
tion, a  breakdown  of  the  credit  system  may  occur, 
which,  in  the  ignorance  of  the  true  nature  of  the 
excessive  draft,  may  cause  a  sudden  demand  for 
liquidation  and  precipitate  a  crisis,  or  at  least  a 
financial  panic.  Since  expenditure  for  subsistence 
represents  about  fifty  per  cent,  of  the  ordinary 
person's  expenditures,  it  can  easily  be  seen  that 
a  rise  or  fall  in  the  price  of  food  will  control  the 
direction  of  a  very  considerable  part  of  the  pur- 
chasing power  of  society.  An  increase  in  the  cost 
of  food  will  withdraw  the  buying  power  upon  which 
the  prosperity  of  many  lines  of  industry  has  rested. 
A  decrease  in  the  cost  of  food  will  release  a  large 
buying  power,  which,  before  the  direction  of  its 
demand  is  known,  will  serve  as  a  strong  speculative 
influence.^  Nor  need  the  fluctuations  in  harvests 
be  great  to  generate  considerable  price  fluctua- 
tions.    Gregory  King's  tables  on  the  relation  be- 

7  Cf.  Max  Wirth,  "  Geschichte,"  3d  ed.,  pp.  5,  247;  A.  Wagner, 
"Zur  Lehre  von  den  Banken,"  p.  205;  Rodbertus,  "  Meyer  Briefe," 
Bd.  I,  p.  102. 

141 


ECONOMIC   CRISES 

tween  quantity  and  price  fluctuations  may  be 
recollected  in  this  connection.  They  show,  for 
example,  that  to  decrease  the  quantity  of  a  com- 
modity by  fifty  per  cent,  would  increase  its  price 
by  more  than  fifty  per  cent.^  Finally,  as  the 
modern  money  market  is  organized,  an  unusual 
demand  for  cash  may  sometimes  occasion  serious 
consequences.  In  the  words  of  Mr.  Bagehot : 
"  Any  sudden  event  which  creates  a  great  demand 
for  actual  cash  may  cause,  and  will  tend  to  cause, 
a  panic  in  a  country  where  cash  is  much  econo- 
mized, and  where  debts  payable  on  demand  are 
large.  In  such  a  country  an  immense  credit  rests 
on  a  small  cash  reserve,  and  an  unexpected  and 
large  diminution  of  that  reserve  may  easily  break 
up  and  shatter  very  much,  if  not  the  whole,  of  that 
credit."^  It  was  Mr.  Jevons's  idea  that  if  the  peri- 
odicity of  sun-spots  could  be  shown  to  have  a 
counterpart  in  a  fluctuation  of  harvests,  and  if  this 
fluctuation  of  harvests  through  an  unusual  pres- 
sure on  the  autumnal  money  market  could  be 
shown  to  be  the  cause  of  crises,  he  would  have 
explained  the  law  of  periodicity.  More  fully 
stated,  the  chain  of  reasoning  which  it  was  hoped 
to  establish  was  as  follows  :  A  periodicity  in  the 
fluctuation  of  sun-spots  has  been  clearly  proven. 

^  Tooke,  "History  of  Prices,"  Vol.  I,  pp.  12-14.  In  this  con- 
nection Tooke  enumerates  as  the  three  most  important  causes  of 
fluctuations  in  prices,  the  effect  of  the  seasons,  war,  and  changes  in 
the  currency. 

9  Walter  Bagehot,  "  Lombard  Street,"  Ch.  VI. 
142 


THE   PERIODICITY   OF  CRISES 

The  periods  of  maximum  appearance  are  separated 
by  an  interval  of  about  10.45  years.  This  period 
is  within  a  fraction  of  the  average  lapse  between 
the  well-known  English  crises  of  1837,  ^^47>  1857, 
1866,  and  1878.  This  coincidence  of  periods 
raises  something  of  a  presumption  that  there  is 
a  causal  connection  between  the  two.  There  is  a 
theory  that  numerous  sun-spots  indicate  a  greater 
activity  upon  the  surface  of  the  sun  than  exists  at 
periods  of  minimum  spots.  This  activity  must 
influence  the  radiation  of  heat.  If  more  heat  is 
radiated  at  one  time  and  less  at  another  there  will 
be  a  consequent  variation  in  the  amount  of  heat 
received  by  the  earth.  A  period  of  relatively  cold 
seasons,  when  less  than  the  ordinary  amount  of 
light  and  heat  is  received,  will  be  one  of  cloudy, 
wet  weather,  insufficient  warmth  for  ripening 
crops,  hence  one  of  poor  crops  and  relatively 
high  prices  for  agricultural  products.  The  suc- 
ceeding period,  as  influenced  by  fluctuations  in  the 
solar  radiation,  will  be  of  opposite  character,  and 
so  in  succession  each  period  will  be  followed  by  its 
opposite. 

The  investigations  of  Mr.  Jevons  were  for  the 
purpose  of  proving  whether  or  not  the  harvest 
cycle  was  marked  enough  in  its  influence  on 
prices  to  justify  the  belief  that  it  was  the  cause 
of  the  crises  cycle.  Early  English  price  records 
were  first  examined  by  him,  and  although  some 
slight  evidences  of  a  periodicity  in  price  fluctua- 
tion were  obtained,  no  conclusions  could  be  based 

143 


ECONOMIC   CRISES 

upon  them.  The  tables  of  merchandise  exported 
from  England  to  India  also  failed  to  give  any  testi- 
mony. In  this  connection  the  history  of  famines 
in  India  was  examined,  and  a  striking  and  signifi- 
cant periodicity  was  observed. ^^  Records  of  exports 
from  Maryland  and  Virginia  to  England  between 
1 700  and  1 770  exhibited  periodic  variations,  though 
broken  at  one  or  two  points.  In  the  examination  of 
the  English  records  of  this  time,  Mr.  Jevons  found 
that  the  South  Sea  Bubble  and  the  crisis  of  1721 
were  exactly  at  the  interval  between  the  eleventh  and 
twelfth  sun-spot  period,  reckoning  back  from  1837. 
Studying  carefully  each  period  between  these  two 
dates,  and  registering  every  crisis  year,  as  well  as 
every  year  showing  special  commercial  distress  or 
unsound  activity,  Mr.  Jevons  constructed  a  list 
which  certainly  shows  all  that  the  history  of  Eng- 
lish crises  can  be  made  to  prove  for  the  theory  of 
periodicity,  and  probably  claims  much  more  than 
that  history,  fairly  interpreted,  will  justify.  The 
list  is  as  follows,  unimportant  business  disturb- 
ances being  indicated  by  a  question  mark  :  (1701 .-'), 
171 1,  1721,  1731-32,(1742.?  1752.?),  1763,  1772-73, 
1783,  1793,(1804-5.?),  1815,  1825,  1836-39,  1847, 
1857,  ^8^^,  1878. 

It  must  be  very  apparent  to  every  one  that  an 

^°  Jevons,  "  Currency  and  Finance,"  pp.  216,  236-238.  Some 
testimony  on  this  point  is  adduced  by  Mr.  Cornelius  Walford  in  his 
paper,  "  On  the  Famines  of  the  World  :  Past  and  Present,"  pub- 
lished in  the  "  Journal  of  the  Royal  Statistical  Society  "  for  Septem- 
ber, 1878,  Vol.  XLI,  p.  521. 

144 


THE   PERIODICITY   OF   CRISES 

argument  of  this  sort  is  extremely  liable  to  abuse 
unless  in  the  hands  of  an  unusually  conscientious 
expert,  and  unless,  also,  a  rigid  criterion  is  adopted 
as  to  what  may  be  allowed  as  constituting  a  crisis 
for  the  purpose  of  supplying  a  missing  link  in  a 
series  like  the  above.  Even  the  best  of  reasoners, 
if  once  possessed  of  an  idea  of  this  sort,  are  liable 
to  overestimate  the  importance  of  certain  phenom- 
ena which  help  to  prove  their  theories.  The  histor- 
ical proof  must  certainly  be  said  to  be  inconclusive. 
The  objections  to  this  theory  are  both  numerous 
and  vital.  In  the  first  place  there  has  been  diffi- 
culty in  the  investigation  of  sun-spots,  and  uncer- 
tainty as  to  the  sun-spot  period.  It  was  first 
calculated  to  be  ii.ii  years,  but  was  later  changed 
after  more  careful  observation  to  10.45  years. 
The  facilities  for  accurate  observation  have  been 
gradually  improving  so  that  modern  records  can- 
not be  compared  with  the  work  of  a  former  period 
without  due  allowance.  Again,  no  substantial 
agreement  has  yet  been  reached  among  astron- 
omers regarding  the  cause  of  sun-spots  ^^  and  their 

11  Nathan  T.  Carr  shows  that  neither  Newcomb,  Secchi,  Faye, 
nor  Young  was  able  to  hazard  an  explanation  of  sun-spots.  The 
latter  rejects  the  influence  of  planetary  bodies,  which  theory  is 
founded  upon  the  coincidence  of  Jupiter's  revolution  with  the  ten- 
year  sun-spot  period,  and  to  which  Jevons  referred.  Carr  considers 
sun-spots  as  periodic  bursting  forth  of  imprisoned  gases,  which, 
being  steadily  generated  within  the  sun's  mass,  gradually  increase 
pressure  against  the  obstructions  confining  them.  "The  Sun;  Its 
Constitution;  Its  Phenomena;  Its  Conditions,"  New  York,  1883, 
Sec.  25. 

L  145 


ECONOMIC   CRISES 

meteorological  significance.  It  throws  doubt  upon 
the  ten-year  argument  to  know  that  if  almost  any- 
other  number  of  years  is  chosen,  it  can  be  shown 
to  correspond  with  the  price  fluctuations  in  many 
tables.  The  French  economist  Juglar  has  noted 
cycles  of  five  and  six  years  in  the  accounts  of  the 
Bank  of  France. ^^  Jevons  himself  says  :  "  In  1875 
I  made  a  laborious  reduction  of  the  data  contained 
in  Professor  Thorold  Rogers's  admirable  '  History 
of  Agriculture  and  Prices  in  England  from  the 
Year  1259.'  I  then  believed  I  had  discovered  the 
solar  period  in  the  prices  of  corn  and  various 
agricultural  commodities,  and  I  accordingly  read 
a  paper  to  that  effect  at  the  British  Association 
at  Bristol.  Subsequent  inquiry,  however,  seemed 
to  show  that  periods  of  three,  five,  seven,  nine,  or 
even   thirteen    years  would   agree  with    Professor 

12  Juglar,  "Journal  des  Economistes,"  1856.  Schaffle  relies  on 
Juglar  in  saying  that  every  six  or  seven  years  a  general  liquidation 
appears  to  be  necessary  in  France,  in  order  to  allow  trade  to  enter 
upon  a  new  period  of  growth.  Roscher,  "  Ansichten,"  Bd.  II, 
p.  381,  mentions  on  the  authority  of  Fregier  that  crises  occur  in 
France  every  three  or  five  years. 

All  these  contradictory  statements  most  effectually  dispose  of  one 
another.  Concerning  English  conditions  Friedrich  Engels  has  tes- 
tified as  follows  in  the  introduction  to  his  work,  "  The  Condition  of 
the  Working  Classes  in  England  in  1844,"  pp.  x,  xi:  "The  recur- 
ring period  of  the  great  industrial  crises  is  stated  in  the  text  as  five 
years.  This  was  the  period  apparently  indicated  by  the  course  of 
events  from  1825  to  1842.  But  the  industrial  history  from  1842 
to  1868  has  shown  that  the  real  period  is  one  of  ten  years,  that  the 
intermediate  revulsions  were  secondary,  and  tended  more  and  more 
to  disappear.    Since  1868  the  state  of  things  has  changed  again  ..." 

146 


THE    PERIODICITY   OF   CRISES 

Rogers's  data  just  as  well  as  a  period  of  eleven 
years ;  in  disgust  at  this  result  I  withdrew  the 
paper  from  further  publication."  ^^  A  further  com- 
plication attends  from  the  fact  that  there  are  other 
climatic  periods,  that  these  price  investigations 
gave  evidences  of  larger  price  cycles,  and  that  the 
records  of  sun-spots  vary  not  only  in  a  short  cycle 
of  years  but  through  a  much  longer  one.  From 
observations  made  upon  glaciers,  geographers  have 
noted  a  climatic  period  of  about  thirty-five  years. 
The  maxima  of  these  climatic  periods  have  fallen 
in  the  years  1767,  18 14,  1840,  in  neither  of  which 
there  has  been  a  crisis.  In  regard  to  a  larger 
sun-spot  cycle,  Professor  Balfour  Stewart  says:  "  It 
appears  that  these  eleven-yearly  oscillations  are 
not  always  of  the  same  magnitude ;  sometimes 
they  are  large,  and  sometimes  small.  They  were 
probably  small  about  the  middle  of  the  last  cen- 
tury, becoming  large  toward  the  end  of  it ;  they 
were  again  small  about  the  early  part  of  the 
present  century.  They  have  recently  been  large, 
and  we  may  suspect  that  in  the  future  there  will 
again  be  a  falling  off."  This  corresponds  with 
the  conclusions  of  Carrington,  as  shown  in  the  dia- 
grams pubHshed  in  his  "  Observations  of  Solar 
Spots." 

Another  objection  to  this  theory  is  the  lack  of 
proof  that  sun-spots  exert  an  important  determina- 
tive influence  upon  climate.     Sir  William  Herschel 

18  «« Currency  and  Finance,"  p.  225. 


ECONOMIC   CRISES 

said :  "  I  think  we  may  reasonably  conclude  that 
there  must  be  a  manifest  difference  in  the  emission 
of  light  and  heat  from  the  sun.  .  .  .  With  regard 
to  the  contemporary  severity  and  mildness  of  the 
seasons,  it  will  hardly  be  necessary  to  remark  that 
nothing  decisive  can  be  obtained."!^  Considering 
the  distribution  of  land  and  water  masses  on  the 
earth,  the  effect  of  the  declination  of  the  earth's 
axis,  of  nearness  or  remoteness  to  the  equator,  of 
mountain  chains,  variations  in  the  soil  and  its 
vegetable  covering,  the  prevailing  directions  of 
the  winds  and  other  atmospheric  phenomena,  it 
is  not  a  simple  thing  to  say  what  the  effect  of  a 
given  variation  in  the  amount  of  heat  radiated 
to  the  earth  would  be  upon  the  climate  of  any 
country.  The  effect  of  an  increase  in  the  solar 
heat  received  during  a  summer  might  improve  the 
harvests  of  England,  but  diminish  those  of  Egypt.^^ 

""Philosophical  Transactions  of  the  Royal  Society  for  1801," 
Vol.  XCI,  p.  310. 

1*  "  It  is  very  probable  that  the  excess  of  sunshine  which  pro- 
duces drought  and  famine  in  India  has  an  opposite  effect  on  the 
prosperity  of  England  and  all  other  countries  lying  between  the  iso- 
thermal lines,  and  that  the  more  moderate  degree  of  sunshine 
which  may  suit  the  Indian  cultivator  is  insufficient  to  properly 
ripen  English  wheat  and  other  produce  (oats  excepted),"  —  Mr. 
John  Kemp,  in  "Commercial  Crises  and  Sun-Spots,"  "Nature," 
December  5,  1878,  Vol.  XIX,  p.  97.  A  reciprocal  climatic  relation 
between  countries  and  in  connection  with  sun-spots  is  indicated  by 
some  barometric  records.  See  article  "On  the  Barometric  See- 
Saw  between  Russia  and  India  in  the  Sun-Spot  Cycle,"  in  "  Na- 
ture," March  18,  1880,  in  which  Mr.  H.  F.  Blanford  makes  the 
following  statement :  "  There  is  a  reciprocating  and  cychcal  oscilla- 

148 


THE    PERIODICITY   OF   CRISES 

Mr.  Jcvons  himself  admitted  that  changes  due  to 
solar  radiation  would  have  little  or  no  traceable 
influence  upon  the  complicated  climate  of  Europe. 
At  least  no  success  has  been  attained  in  showing 
periodicity  in  the  variations  of  the  price  of  either 
European  or  English  grain  for  recent  times.  These 
considerations  suggest  that  if  the  climates  of  various 
regions  of  the  earth  are  in  any  degree  reciprocal, 
the  modern  growth  of  the  means  of  transportation 
has  so  expanded  as  to  distribute  the  surplus  of 
abundantly  supplied  areas  over  those  less  well  sup- 
plied and  neutralize  price  fluctuations  which  might 
otherwise  result.  The  principal  European  markets 
receive  wheat  from  all  parts  of  the  world  and  dis- 
play great  stability  of  prices.  This  equalizing 
effect  of  commerce  has  been  greatest  during  this 
century,  but  it  is  precisely  during  this  century  that 
economic  crises  have  been  most  acute  and  most 
steadily  recurrent. 

We  may  still  further  object  to  the  sun-spot 
theory,  not  only  that  the  sun-spot  phenomena  are 
imperfectly  understood  and  that  their  relation  to 
climate  remains  to  be  defined,  but  that  the  relation 
between  variations  in  harvests  and  crises  is  not 
more  satisfactorily  explained  than  any  of  the  other 

tion  of  atmospheric  pressure,  of  such  a  character  that  the  pressure 
is  at  a  maximum  in  Western  Siberia  and  Russia  about  the  epoch 
of  maximum  sun-spots,  and  in  the  Indo-Malayan  area  at  that  of 
minimum  sun-spots."  But  this  idea  of  reciprocal  relations  cannot 
be  safely  pressed  very  far.  See  E.  Reclus,  "The  Earth  and  its 
Inhabitants;  North  America,"  Vol.  Ill,  "The  United  States," 
p.  254. 

149 


ECONOMIC   CRISES 

steps  in  this  chain  of  influences.  We  are  told  on 
the  one  hand  by  Jevons  that  abundant  harvests 
have  often  aroused  a  speculative  spirit  as  the  result 
of  prosperity  and  have  led  to  ill-advised  business 
activity  and  eventually  to  crises.  On  the  other 
hand,  the  English  crisis  of  1847  is  included  by 
Jevons  among  others  upon  which  he  places  reliance 
to  found  his  periodical  series.  This  disturbance 
was  brought  on,  however,  in  part  by  harvest  fail- 
ures which  compelled  England  to  send  her  gold 
to  the  United  States  for  provisions.  This  drain 
of  gold  under  the  working  of  Peel's  Bank  Act 
caused  a  stringency  of  the  money  market.  The 
harvest  theory  appears  to  be  holding  to  both  horns 
of  the  dilemma. 

Finally  the  incidence  of  crisis  years  and  of  maxi- 
mum or  minimum  sun-spot  years  is  not  identical. 
The  investigations  of  Schwabe  showed  that  the 
years  of  maximum  sun-spot  frequency  were  1828, 
1837,  1848,  i860,  and  1 87 1.  The  minimum  years 
were  1833,  1844,  1855,  1867.  But  during  this  period 
the  English  crises  fell,  as  we  have  already  seen, 
in  the  years  1825,  1836-39,  1847,  1857,  1866,  1873. 
The  series  of  crises  as  it  stood  some  years  ago  pre- 
sented more  of  a  foothold  for  an  argument  con- 
cerning periodicity  than  it  does  at  the  present  time, 
since  the  last  two  or  three  crises,  both  in  England 
and  the  United  States,  have  broken  up  the  rather 
remarkable  rhythmic  succession  of  the  earlier  part 
of  the  series.  As  President  A.  T.  Hadley  has  said, 
"  The  Civil  War  in  the  United  States  quite  broke 

150 


THE   PERIODICITY   OF   CRISES 

up  the  regular  ten-year  round  of  crises,  and,  as  it  did 
not  have  any  appreciable  effect  on  the  sun-spots, 
it  may  be  said  to  have  broken  up  the  theory  also."  ^^ 
But  even  if  the  character  of  the  crises  prior  to  this 
most  recent  period  be  considered  with  care,  it  will 
be  seen  that  while  a  harvest  theory  might  help  to 
explain  the  occurrence  of  some  disturbances,  its 
application  to  others  is  absurd.  One  might  per- 
haps admit  some  proof  in  connection  with  the 
English  crises  of  1825  or  1847,  or  the  American 
crises  of  1836-39,  but  how  shall  the  international 
crises  of  1857  and  1 873  be  explained  .-'  The  har- 
vest theory  is  inapt  as  an  explanation  of  the  appear- 
ance of  John  Law  and  the  insane  hopes  built  upon 
prospects  of  colonial  trade  which  led  to  the  crisis 
of  1720.  This  theory  does  not  apply  to  the  Eng- 
lish crisis  of  181 5  which  hung  upon  the  termination 
of  the  Napoleonic  wars,  nor  to  the  financial  situa- 
tion in  London  in  1866.  It  affords  no  explanation 
of  Black  Friday  in  1869,  nor  of  the  Baring  and 
Copper  Syndicate  failures  in  1890,  and  it  does  not 
account  for  the  crisis  of  1893. 

RESUME 

I.    Theories  of  crises  have  been  suggested  by  the  fact  that 
crises  are  distributed  with  a  certain  uniformity  of 
interval. 
II.    Intermittent  character  of  social  phenomena. 
Due  to  the  seasons. 
Periodic  reforms. 

^^  Johnson's  " Universal  Cyclopaedia,"  article  "Commercial  Crises." 


ECONOMIC   CRISES 

Settlement  of  western  America. 
Table  of  crisis  years. 

III.  Periodicity  of  crises  and  credit. 

The  gradual  expansion  and  final  overgrowth  of  credit. 
Replacement  of  generations  of  business  men. 

IV.  "  Harvest  and  Sun-Spot "  theory. 

Influence  of  the  quarter-day. 

Theory  of  the  influence  of  sun-spots. 

Mr.  Jevons's  futile  search  for  periodic  price  fluctuations. 

His  list  of  crisis  years. 

Objections :  Apparent  existence  of  numerous  price 
cycles  ;  no  correspondence  between  crisis  years 
and  years  of  maxima  or  minima  sun-spots  ;  com- 
plexity of  climate  and  the  equalization  of  prices 
through  commerce.  Recent  crises  have  broken 
the  regular  succession  of  some  earlier  ones. 


152 


CHAPTER   VIII 

CREDIT   AND   SPECULATION 

One  of  the  most  constant  characteristics  of  the 
pre-crisis  period  is  an  abnormal  extension  of  credit. 
It  is  significant  that  historically  the  appearance  of 
crises  is  practically  simultaneous  with  the  growth 
of  our  present  system  of  credit  economy.  The 
distribution  of  crises  between  nations  also  corre- 
sponds with  the  extension  of  the  use  of  credit. 
Credit  creates  between  the  members  of  industrial 
society  an  economic  bond  of  primary  strength, 
making  the  uncertainties  which  influence  one  party 
of  vital  concern  to  every  other.  The  relations  of 
debtor  and  creditor  in  modern  society  have  been 
likened  to  the  life  cords  used  to  bind  together  a 
company  of  mountain  tourists.  It  is  certain  that 
at  least  in  times  of  distress  credit  and  money  are 
those  agencies  of  the  market  which  make  men 
reahze  the  economic  interpretation  of  the  saying, 
"  For  none  of  us  liveth  to  himself,  and  no  man 
dieth  to  himself."  ^ 

Credit  serves  to  separate  by  an  interval  of  time 

1  Romans  xiv.  7.  In  1844  Joseph  Mazzini  said,  "Credit  nowa- 
days is  no  longer  a  national,  but  a  European,  institution."  It  may 
now  be  considered  a  world  institution. 


ECONOMIC  CRISES 

the  two  parts  of  a  complete  act  of  exchange,  and 
it  serves  to  hold  the  market  in  a  state  of  suspense 
as  to  what  the  effect  of  the  postponed  part  of  the 
transaction  will  be,  or,  indeed,  whether  the  transac- 
tion will  ever  be  completed  or  not.  In  the  balancing 
of  demand  and  supply,  particularly  with  reference 
to  money,  this  uncertainty  in  the  element  of  time 
is  a  very  important  consideration.  The  economist 
Roscher  has  shown  that  in  a  money  and  credit 
economy,  demand  and  supply  cannot  be  looked 
upon  merely  as  two  sides  of  the  same  thing,  as 
some  writers  have  asserted.^ 

The  transfer  of  money  or  money's  worth,  facili- 
tated by  credit,  involves  the  confidence  on  the  part 
of  the  creditor  that  the  debtor  is  able  and  willing 
to  repay  the  loan  and  to  execute  in  a  proper  man- 
ner whatever  other  conditions  are  agreed  upon  or 
implied.  It  is  true  that  in  many  forms  of  credit 
transactions  specific  evidences  of  indebtedness  are 
created  and  certain  rights  and  titles  to  property 
are  given  the  creditor  to  afford  a  partial  basis  for 
his  confidence,  but  considering  the  methods  by 
which  business  is  usually  transacted,  it  is  obvious 
that  a  large  portion  of  credit  transfers  rest  chiefly 
upon  personal  security ;  in  short,  upon  probity  or 
honor.  The  effect  of  such  transactions  is  as  vari- 
ous as  the  circumstances  under  which  credit  is 
granted  and  the  character  of  the  parties  involved. 
As  language  will  serve  to  convey  the  noblest  or  the 

2  Roscher,  "  Ansichten,"  Bd,  II,  "  Zur  Lehre  von  den  Absatz- 
krisen,"  Sec.  3. 


CREDIT   AND   SPECULATION 

basest  of  thoughts,  so  credit  will  serve  to  enhance 
or  diminish  the  economic  well-being  of  the  users. 
The  effects  of  credit  vary  as  the  uses  to  which  the 
wealth  transferred  is  put.  It  has  been  called  the 
highest  triumph  and  the  "  shadow-side  "  of  modern 
culture.  As  Lorenz  von  Stein  has  said,  it  resembles 
the  press  in  the  world  of  thought,  alike  a  minister 
to  good  and  evil. 

The  widespread  growth  of  the  system  of  credit 
is  ample  evidence  that  it  performs  useful  services. 
It  is  usually  thought  an  advantage  to  be  able  to 
transfer  capital  easily  into  the  hands  of  those 
desiring  to  use  it.  Industry  is  certainly  rendered 
more  efficient  by  whatever  facilitates  the  placing 
of  capital  in  the  hands  of  those  best  fitted  to 
manage  and  employ  it.  But  in  so  far  as  crises 
may  be  considered  the  result  of  unwise  credit, 
they  may  be  looked  upon  as  evidence  that  capital 
does  not  through  credit  seek  out  with  sufficient 
certainty  the  ablest  managers.  It  is  the  law  of 
nature  that  a  man  shall  go  through  the  educat- 
ing and  subduing  process  of  earning  wealth  before 
bearing  the  responsibility  of  its  management. 
How  far  we  can  safely  suspend  this  law  is  a 
question.  Credit  increases  in  some  persons  the 
desire  to  save  by  affording  in  advance  an  easy 
solution  of  the  question  of  investment.  It  pre- 
vents wealth  which  is  saved  from  being  hoarded 
and  gives  industry  the  largest  proportion  of  the 
sum  saved.  Credit  assembles  small  savings  to 
make  up  the  amounts  necessary  to  carry  through 
155 


ECONOMIC   CRISES 

great  undertakings.  When  it  is  said  that  credit 
facihtates  the  transfer  of  values,  it  is  implied  that 
it  saves  the  use  of  money.  Adam  Smith  said  that 
if  money  serves  as  a  highway  of  trade,  credit  may 
be  likened  to  a  highway  through  the  air  which 
permits  the  release  of  a  portion  of  the  precious 
metals  for  other  uses.^  It  also  saves  the  time, 
trouble,  and  expense  which  would  otherwise  be 
necessary  to  make  separate  and  complete  pay- 
ments in  every  business  transaction. 

The  dangers  and  abuses  which  have  connected 
themselves  with  credit  have  by  no  means  escaped 
the  attention  of  economic  writers  who  have  given 
attention  to  crises.  John  Stuart  Mill  and  Adolph 
Wagner  have  so  far  emphasized  the  part  played 
by  credit  as  to  favor  the  use  of  the  phrase  "  credit 
crises."  Schaffle,  Michaelis,  Von  Mangoldt,  Flur- 
scheim,  and   Von   Stein,  together  with   Juglar  in 

8  By  these  means  it  increases  the  amount  of  disposable  capital. 
Von  Stein  makes  the  growth  of  credit  the  last  and  real  ground  of 
commercial  crises.  He  says :  "  The  causes  of  commercial  crises  lie 
in  the  causes  which  check  payments.  As  payments  result  from 
sales,  a  lack  of  sales  is  the  first  cause  of  crises.  The  cause  of  a 
lack  of  sales  lies  in  the  fact  that  production  suddenly  outruns  con- 
sumption, because  of  which  naturally  a  portion  of  the  product 
remains  unsold.  The  cause  of  this  sudden  increase  of  production 
lies  in  the  rapid  increase  of  productive  capital,  and  since  this  is 
occasioned  by  credit,  the  rapid  increase  of  credit,  interest  not 
being  considered,  is  the  cause  of  commercial  crises.  Credit,  as  it 
is  the  source  of  progress,  is  also  the  source  of  danger.  It  is  in  the 
economic  world  what  the  press  is  in  the  world  of  thought.  No- 
where is  the  good  more  closely  connected  with  the  evil."  —  "  Lehr- 
buch  der  Volkswirthschaft,"  p.  228. 


CREDIT  AND   SPECULATION 

France  and  Macleod  in  England  have  pointed 
out  the  sensitiveness  of  credit  and  have  indicated 
some  of  its  prevalent  abuses.* 

To  understand  the  dangers  inhering  in  the  use 
of  credit  it  is  necessary  to  observe  the  sensitive- 
ness of  the  instrument.  Depending  as  it  does 
upon  confidence,  it  is  as  changeable  as  the  course 
of  public  thought.^  Credit  facilitates  a  system 
of  exchanges  which  money  is  incapable  of  main- 
taining unaided.  The  extension  of  credit  is  ac- 
companied by  a  realization  that  if  any  large  part 
of  the  mechanism  of  trade  should  meet  with 
disaster  capable  of  shaking  confidence,  the  result 
would  be  the  withdrawal  of  credit  and  a  conse- 
quent stringency  in  the  money  market.  A  ner- 
vous watch  is  therefore  maintained  for  such 
occurrences,  and  the  dread  of  the  headlong  rush 
for  liquidation,  in  which  some  must  inevitably  be 
crushed,  always  lurks  in  the  background  of  modern 
industry.^ 

*  Few  writers  deny  that  important  connections  exist  between 
crises  and  credit  and  speculation.  Those  writers  who  hold  the 
Rodbertus  theory  of  crises  tend  to  deny  or  minimize  these  connec- 
tions, however.  See  Theodor  Hertzka,  "  Die  Gesetze  der  socialen 
Entwickelung,"  Bd.  I,  Ch.  VIII,  pp.  95-106. 

s  Cf.  Bagehot, "  Lombard  Street,"  "  Complete  Works,"  Vol.  V,  pp. 
182-183.  On  p.  48  he  says, "Every  banker  knows  that  if  he  has 
to  prove  that  he  is  worthy  of  credit,  however  good  may  be  his 
arguments  in  fact,  his  credit  is  gone."  See  also  "  Mechem  on 
Agency,"  Sec.  209,  p.  136,  Detroit,  1888. 

^  A  description  of  unsound  credit  so  neat  and  delicate  as  to 
scarcely  admit  of  translation  is  given  by  Schaffle  in  the  following 
words :    "  Ein  Kreditgebaude  muss  sich  in  die  Luft  zimmern,  so 


ECONOMIC   CRISES 

The  specific  circumstances  which  may  lead  to 
the  destruction  of  credit  are  innumerable.  Credit 
may  be  called  upon  to  procure  the  means  for 
unproductive  and  unwise  consumption '  or  for  the 
carrying  through  of  reckless  schemes  of  produc- 
tion. The  more  sudden  the  demand  for  capital, 
the  more  certain  it  is  that  the  demand  will  be 
accommodated  through  credit  instrumentalities.  In 
so  far  as  credit  brings  savings  to  investment,  it 
lessens  the  reserve  funds  both  of  money  and  com- 
modities which  remain  unentangled  from  the 
productive  mechanism  and  which  may  be  drawn 
upon  in  case  that  mechanism  falls  into  disaster. 
It  is  said  that  capital  lengthens  the  act  of  produc- 

leicht,  dass  ein  Windhauch  es  endlich  zusammen  blasen  kann. 
Geht  ein  einziges  died  aus  der  Fuge,  so  stiirzen  alle  anderen, 
bleibt  eine  Zahlung  aus,  findet  nicht  ganz  genau  der  kalkulierte 
Absatz  zur  kalkulierten  Zeit  und  zum  kalkulierten  hohen  Praise 
statt,  so  fallt  dann  mit  einem  Ringe  die  ganze  papierne  Kette 
auseinander."  —  "  Gesammelte  Aufsatze,"  Bd.  11,  p.  26,  1886. 

"  Bagehot  points  out  that  the  borrowing  of  spendthrifts  is  in- 
significant compared  with  the  entire  amount  of  credit  transfers. 
Spendthrift  borrowing,  he  says,  is  now  only  Ukely  to  occur,  on  any 
great  scale,  in  public  finance.  "  Complete  Works,"  Vol.  V,  p.  438. 
For  the  opposite  view,  that  frivolous  expenditure  is  less  likely  to 
occur  in  public  than  in  private  finance,  see  Cohn,  "  Finanzwissen- 
schaft,"  pp.  182-185.  This  discussion  seems  to  hinge  on  how  war 
expenses  are  classified.  Bagehot  cites  the  expenses  of  the  Seven 
Years'  War  to  France.  Held  says  that  war  expenses  can  only 
be  considered  unproductive  from  a  purely  economic  standpoint. 
"  Kredit,"  in  Bluntschii's  "  Staatsworterbuch,"  Loning  ed.,  Bd.  II, 
p.  424.  Wagner  attempts  something  of  a  justification  even  upon 
economic  grounds.  "  Finanzwissenschaft,"  3  Aufl.,  Bd.  I,  pp.  73, 
416-418. 


CREDIT  AND   SPECULATION 

tion  and  renders  it  more  roundabout.  In  so  far 
as  credit  facilitates  the  use  of  capital,  it  assists  in 
lengthening  the  forecast  of  the  market  which 
producers  must  make,  and  so  increases  uncer- 
tainty while  it  multiplies  the  number  of  interests 
involved  in  every  transaction. 

The  realization  of  the  force  of  coming  obliga- 
tions is  always  more  indistinct  the  more  distant 
they  are  in  the  future.  It  is  partly  because  they 
believe  that  patrons  will  buy  somewhat  more 
liberally  when  buying  "on  account"  that  mer- 
chants consent  to  be  harassed  with  the  costly 
and  annoying  "credit"  system.  Because  of  this 
inability  to  realize  fully  the  future,  the  chattel- 
mortgage,  lightning-rod  shark  of  the  past  was  tol- 
erated and  the  instalment  plan  now  proves  a  means 
of  extortion  in  dishonest  hands.  It  is  a  well-known 
fact  that  while  strikes  against  a  reduction  of  wages 
are  frequent,  laborers  can  seldom  be  united  to 
strike  against  unhealthful  conditions  which  do 
not  indeed  reduce  wages  for  the  moment,  but 
which  mean  future  loss  in  sickness  and  hastened 
decrepitude.  The  public  shows  itself  relatively 
indifferent  in  regard  to  the  expenditure  of  funds 
which  are  provided  by  the  creation  of  public  debt, 
the  redemption  of  which  is  placed  in  the  indefinite 
future.^      There   is   a   false   feeling   of    opulence 

^  Mr.  Albert  S.  Bolles  well  says,  "  Nothing  ever  chills  the  desire 
to  spend  money,  especially  for  the  benefit  of  the  public,  so  quickly  as 
an  immediate  demand  for  it."  —  Lalor's  "Cyclopaedia,"  "Finance," 
Vol.  II,  p.  187. 

159 


iXONOMIC   CRISES 

attending  the  removal  of  one's  obligations  to  the 
future.  The  borrower  has  to  deal  with  an  instinc- 
tive feeling  that  as  the  result  of  his  transaction 
he  has  in  some  way  made  a  gain  which  will  per- 
mit of  a  little  carelessness  or  generosity.  The 
force  of  this  may  in  an  individual  instance  be 
great  or  small,  but  the  widespread  use  of  credit 
makes  even  the  minor  characteristics  of  borrowing 
important,  if  they  can  be  shown  to  be  constant. 

Credit  should  be  granted  for  short  periods  only, 
even  if  often  renewed.  Long  credits  work  a  grad- 
ual insensibility  to  the  idea  of  obligation  and  lead 
to  practices  not  harmonious  with  the  position  of 
a  debtor.  Punctuality,  one  of  the  most  funda- 
mental of  economic  virtues,  is  in  any  industrial 
community  largely  regulated  by  the  practice  of 
the  banks.  "  It  may  not  be  true  that  punctuality 
is  the  parent  of  all  virtues ;  but  unmistakably  is 
procrastination  the  mother  of  every  vice,  whether 
in  social  or  personal  character.  There  is  nothing 
for  making  duty  easy  like  bringing  men  sharply 
up  to  it,  and  firmly  holding  them  there.  On  the 
other  hand,  obligations  grow  heavier  and  heavier 
the  longer  they  are  put  off.  What  was  first  pro- 
crastinated, it  is  soon  sought  to  evade ;  self-respect 
wilts  under  the  reproaches  of  the  creditor ;    dis- 

On  the  general  topic  of  the  realization  of  distant  results,  see 
Spinoza,  "Ethics,"  Propositions  IX  and  X.  For  the  application  to 
economics,  see  Bdhm-Bawerk,  "  Positive  Theory  of  Capital,"  Bk.  V, 
Ch.  I,  "Present  and  Future  in  Economic  Life,"  and  Ch.  Ill, 
"  Underestimate  of  the  Future." 

1 60 


CREDIT   AND   SPECULATION 

honest  suggestions  arise  unrebiiked  in  the  mind 
that  would  once  have  thrust  them  indignantly  out. 
The  advantage  which  the  bank  confers  on  the  com- 
munity by  introducing  a  rigid  standard  of  punctu- 
ality cannot  be  overrated."^ 

It  need  not  be  pointed  out  that  in  the  case  of 
advances  of  money  which  rest  upon  honesty  and 
business  reputation,  precaution  has  to  be  con- 
stantly taken  against  men  who  are  without  means 
and  are  willing  to  put  money  obtained  by  credit 
to  unusual  risk,  the  loss  of  which  they  could  not 
be  compelled  to  make  good,  since  the  profits,  if 
any,  can  be  retained.  A  materiahstic  age  places 
strong  inducements  before  the  ambitious  to  make 
a  dash  for  wealth,  in  spite  of  the  fact  that  the 
game  is  often  simply  the  dishonest  one  of  "  Heads 
I  win,  tails  you  lose."  The  voice  of  public  opin- 
ion is  rendered  equivocal  on  such  matters  by  call- 
ing those  exceptional  ones  who  succeed  by  these 
methods  "smart,"  and  by  giving  prestige  to  wealth 
regardless  of  its  origin.  With  a  loan  the  creditor 
buys  an  interest  in  the  debtor's  ability  and  moral 
character,  and  the  motto  caveat  emptor  is  as  much 
more  significant  in  such  transactions  than  in  ordi- 
nary buying  as  character  and  ability  are  more  dif- 
ficult to  judge  than  goods.  Loans  made  at  the 
average  rates  of  interest  contemplate  only  the 
average  difficulty  of  collection.  If  the  loan  is  one 
of  the  transient  kind  made  in  the  course  of  busi- 
ness, without  security,  justice  would  seem  to  de- 

^  F.  A.  Walker,  "  Money,  Trade,  and  Industry,"  p.  252. 
M  161 


ECONOMIC   CRISES 

mand  extraordinary  caution  on  the  part  of  the 
debtor  not  to  disable  himself  for  meeting  his 
obligations. 

The  chief  credit  institution  of  modern  society  is 
the  bank.  When  crises  have  been  thought  to  be 
due  to  the  misuse  of  credit,  nothing  has  been  more 
common  than  at  once  to  fasten  the  guilt  upon  the 
banks  and  condemn  this  or  that  feature  of  the 
prevailing  bank  system.  The  mistake  of  many 
writers  upon  crises  has  been  to  confine  attention 
too  narrowly  to  some  one  form  in  which  the  abuse 
of  credit  manifests  itself.  A  comparative  study  of 
crises  will  show  that  they  occur  under  the  most 
varied  systems  of  banking  and  currency.^*^  Banks 
are  the  servants  of  trade  and  are  subject  to  the 
same  influences  which  affect  it.  The  abuses  con- 
nected with  credit  which  fasten  attention  upon 
banks,  and  which  inflict  upon  them  the  greatest 
injury,  are  not  always  nor  yet  generally  due  to 
circumstances  connected  with  the  banking  system 
itself." 

A  rising  credit  should  rather  be  considered  like 

1"  "  The  possibility  of  overspeculation  is  correctly  referred  to 
the  misuse  of  credit,  but  again  and  again  will  the  common  mistake 
be  made  of  pointing  out  some  one  particular  form  of  the  use  of 
credit  and  some  one  particular  sort  of  credit  institution  as  the  sole 
cause  of  overspeculation  and  the  abuse  of  credit."  —  Wagner,  in 
"  Rentzsch,"  "  Handvvorterbuch,"  p.  533. 

11  Speaking  of  the  misuse  of  banking  institutions,  Horace  \Vhite 
says :  "  Excessive  issues  and  excessive  credits  are  invariable  con- 
comitants of  the  svi^elling  gale  of  prosperity  which  precedes  and 
ushers  in  a  crisis.  They  are  part  and  parcel  of  the  speculative 
fever  which  pervades  the  community,  but  are  no  more  to  be  ac- 

162 


CREDIT   AND   SPECULATION 

a  rising  tide  the  pressure  of  which  breaks  through 
an  only  too  weak  wall  of  moral  restraint.  At  one 
place  the  abuse  of  credit  may  centre  in  the  bank- 
ing policy,  at  another  in  joint  stock  companies ;  at 
one  time  it  may  be  a  fault  in  the  bankruptcy  laws, 
and  at  another  it  may  be  a  reckless  issue  of  paper 
money.  To  patch  the  crevices  of  industrial  legis- 
lation, as  new  experiences  show  new  defects,  is 
indeed  necessary  and  is  valuable  as  far  as  it  goes, 
but  it  does  not  kill  the  central  evil  nor  prevent  it 
manifesting  itself  in  ever  new  forms. 

The  use  of  credit  has  proven  especially  danger- 
ous in  times  when,  owing  to  some  gratifying 
circumstance,  the  tone  of  business  is  unusually 
optimistic.  It  has  also  proven  dangerous  in  Hues 
of  trade  in  which  trade  estimates  are  unusually 
speculative  and  results  are  uncertain.  The  history 
of  mining,  invention,  and  foreign  trade  is  replete 
with  failures  partly  due  to  easy  credit. 

To  prevent  the  growth  of  unsound  business,  it 
behooves  every  giver  of  credit  to  maintain  a  sharp 
scrutiny  of  the  conditions  under  which  it  is  given. 
Credit,  like  esteem,  is  to  be  given  only  to  the  virtu- 
ous. Backbone  is  quite  as  necessary  in  the  cred- 
itor to  enable  him  to  say  no,  as  in  the  debtor  to 
enable  him  to  resist  the  temptation  to  risk  dishon- 
estly the  possessions  of  another.  It  is  true  that 
the  force  of  competition  presses  upon  the  creditor, 

counted  the  cause  of  it  than  the  excessive  multiplication  of  spindles 
and  of  railways  going  on  at  the  same  time."  —  "  Commercial  Crises," 
in  Lalor's  "Cyclopaedia,"  Vol.  I,  p.  525. 

163 


ECONOMIC   CRISES 

whether  an  individual  or  a  bank,  to  compel  unwise 
accommodation,  but  in  the  same  way  that  labor 
should  resist  the  tendencies  leading  to  the  de- 
basement of  the  standard  of  life,  so  should  capi- 
tal resist  the  tendencies  working  to  debase  the 
standard  of  credit.  An  unwise  credit  is  like  an 
unwise  charity,  full  of  ill  consequences  for  all  par- 
ties involved.  As  with  everything  else,  credit 
easily  gotten  is  lightly  prized.  The  first  credit 
operations  of  a  series  should  always  be  most 
closely  scrutinized,  as  they  tend  to  compel  suc- 
ceeding advances  through  the  force  of  courtesy 
or  business  connections.  Business  accommodation 
and  business  standing  once  granted  are  not  lightly 
to  be  broken  off  or  ruined.  The  situation  com- 
pelling it  is  to  be  avoided  by  merchants  and 
banks  desirous  of  escaping  costly  and  disagreeable 
antagonisms.^^ 

Whatever  agencies  facilitate  the  accurate  esti- 

12  "  A  banker  may  have  a  very  shrevi^d  suspicion  that  his  cus- 
tomer is  overtrading,  but,  as  he  has  no  access  to  his  customer's 
books,  it  may  be  very  difficult  for  him  positively  to  ascertain  the 
fact.  And  if  a  banker  acts  upon  insufficient  grounds,  and  without 
sure  cause  ruins  his  customer,  he  will  get  himself  into  very  bad 
odor,  and  may  do  himself  much  injury.  Of  course,  the  greater  the 
merchant,  the  more  difficult  it  is  to  deal  with  him.  And  great  mer- 
chants who  have  numerous  and  powerful  connections  can  manu- 
facture bills  to  an  incredible  extent  to  cover  up  losses,  and  keep 
themselves  afloat  by  extracting  fresh  funds  from  their  bankers  to 
speculate  with;  until,  when  the  final  collapse  comes,  it  is  found 
that  their  assets  are  almost  all  eaten  away,  and  left  perhaps  a  shil- 
ling or  two  in  the  pound  to  meet  the  masses  of  paper."  —  MAC- 
LEOD, "  The  Theory  of  Credit,"  Vol.  II,  Ch.  XVI,  Sec.  4,  pp.  709-710. 
164 


CREDIT  AND   SPECULATION 

mation  of  character  and  financial  standing  render 
a  useful  service  in  directing  credit.  Such  are 
banks,  mercantile  agencies,  trade  lists,  collection 
agencies,  business  men's  protective  associations, 
and  the  like.  Credit  implies  trust,  and  what  is 
necessary  for  that  is  realized  when  we  say  "trust- 
worthiness." It  means  a  great  deal  that  the 
characteristics  of  modern  business  are  such  as 
increasingly  to  demand  honesty  and  impose  that 
as  the  condition  of  all  success  on  a  large 
scale. 

The  modern  growth  of  credit  has  for  the  first 
time  made  speculation  socially  dangerous.  When 
we  consider  speculation  in  its  broadest  sense,  we 
have  not  simply  to  do  with  the  activities  of  stock 
exchange  "  operators,"  but  with  a  necessary  tenta- 
tiveness  of  judgment  affecting  in  some  degree 
every  human  calculation.  That  sort  of  specula- 
tion which  is  merely  a  rational  provision  against 
future  contingencies,  all  understand  and  appreci- 
ate. Adam  Smith  has  pointed  out  that  speculative 
returns  constitute  a  part  of  all  wages,  especially  of 
those  in  the  higher  occupations  where  considerable 
risk  of  failure  has  been  run.  Although  specula- 
tion involves  the  presence  of  uncertainty,  it  seems 
desirable  to  distinguish  it  from  gambling  or  oper- 
ations on  a  basis  of  pure  chance.  Gambling  has 
only  the  evils  and  none  of  the  virtues  of  specula- 
tion. Throwing  patient  industry  to  the  wind,  it 
fascinates  those  who  engage  in  it  by  an  unending 
series  of  shallow  uncertainties  and  thoughtless  sur- 
165 


ECONOMIC   CRISES 

prises  fit  to  tickle  the  feeble  wits  of  savages  and 
degenerate  types  of  the  human  family. 

It  would  promote  business  integrity  and  pre- 
cision in  ethical  judgments  to  distinguish  between 
speculation  and  gambling.  A  clear  distinction 
would  remove  from  gambling  the  protection  now 
afforded  to  it  by  confusion  with  certain  forms  of 
speculation  which  are  useful  and  honorable.  The 
existence  of  gambling  is  of  relatively  minor  impor- 
tance for  crises.  The  grasping  and  dishonest 
spirit  which  draws  on  the  crisis  is  of  too  calcu- 
lating a  nature  to  be  long  absorbed  with  what 
remains  persistently  within  the  realm  of  chance. 
An  absolute  distinction  cannot  be  made  between 
speculation  and  gambling.  Both  deal  with  chance. 
Chance  is  merely  a  name  by  which  we  designate 
causes  when  they  are  too  subtle  and  complex  to 
be  understood  and  followed  by  human  reason  at 
present.  It  does  not  imply  the  absence  of  causes. 
Hence  the  realm  of  chance  is  lessened  by  every 
fresh  acquisition  of  the  human  intellect.  The 
gambler  accepts  the  results  of  chance  as  final  and 
inexplicable  and  allows  them  to  amuse  or  excite 
him.  Speculation  is  characterized  by  a  constant 
and  strenuous  endeavor  to  penetrate  the  riddle  of 
chance  and  to  discover  some  clew  by  which  to  read 
the  future.  It  is  suggestive  at  least  that  the  word 
"speculation"  is  commonly  used  not  merely  to 
indicate  "  the  investing  of  money  at  a  risk  of 
loss,  on  the  chance  of  unusual  gain,"  but  to 
signify  profound  meditation  or  the  "deep  and 
i66 


CREDIT  AND   SPECULATION 

thorough    consideration    of    a    theoretical    ques- 
tion." 13 

The  chief  service  which  is  performed  by  specu- 
lation is  in  connection  with  the  study  of  uncertain 
conditions.  So  long  as  the  results  of  the  best  esti- 
mates in  regard  to  certain  business  contingencies 
are  more  than  usually  uncertain,  we  speak  of  them 
as  speculative,  and  transactions  based  upon  these 
contingencies  are  speculations.  The  tendency  of 
speculative  estimates  is  to  become  more  and  more 
accurate.     In  this  way  the  influence  of  speculation 

^^  "  Century  Dictionary." 

Cohn  says :  "  Speculation  is  not  merely,  as  Lassalle  asserted,  •  a 
guess  as  to  the  results  which  unknown  circumstances  will  cause.' 
It  is  more  than  that.  It  is  the  warfare  of  intelligence,  equipped 
with  the  knowledge  of  known  forces,  against  the  barbaric  dominion 
of  chance."  —  "  Finanzwissenschaft,"  p.  463.  And  Bowen, "  Specu- 
lation then,  as  McCulloch  remarks,  '  is  only  another  name  for 
foresight.'  "  — "  Principles  of  Political  Economy,"  p.  429.  This 
corresponds  with  the  view  of  P.  J.  Proudhon,  who  enumerates  four 
factors  of  production,  namely :  labor,  capital,  commerce,  and  specu- 
lation. Of  the  latter  he  says :  "  Speculation  is  nothing  else  than 
the  intellectual  conception  of  the  different  ways  in  which  labor, 
credit,  transportation,  and  exchange  can  unite  in  production.  It  is 
speculation  which  discovers  riches,  which  invents  the  most  eco- 
nomic means  of  securing  them,  and  which  multiplies  them  by  new 
forms  or  combinations  of  credit,  transportation,  circulation,  and 
exchange,  by  creating  new  wants  or  by  the  incessant  redistribution 
of  fortunes." — "Manuel  du  Speculateur  h  la  Bourse"  (Paris,  1854), 
p.  54.  Compare  Adam  Smith,  "  Wealth  of  Nations,"  Bk.  IV,  Ch. 
V,  after  the  heading  "  Digression  concerning  the  Corn  Trade  and 
Corn  Laws,"  Sees.  7  and  8.  See  also  Spencer,  "  Social  Statics," 
abridged  ed.,  p.  104.  J.  S.  Mill  gives  an  excellent  account  of 
the  useful  office  of  speculation  when  it  is  confined  in  proper  chan- 
nels. "  Political  Economy,"  Bk.  IV,  Ch.  II,  Sec.  5. 
167 


ECONOMIC  CRISES 

is  to  carry  the  object  of  its  calculations  over  into 
the  field  of  ordinary  certainty,  while  the  speculative 
spirit  is  led  on  to  attempt  the  prediction  of  ever 
more  complex  and  uncertain  phenomena.  The 
hazard  money  placed  on  the  life  of  sailors  in  the 
seventeenth  century,  though  at  first  little  better 
than  gambling,  led  to  the  formation  of  life  tables 
and  the  founding  of  life  insurance,  than  which  few 
industrial  enterprises  are  now  more  certain.  The 
effect  of  true  speculation  is  to  eliminate  itself.  A 
fundamental  part  of  the  struggle  of  civilization  is 
to  lessen  the  domain  of  chance  and  to  extend  the 
field  in  which  we  can  operate  intelligently.  A 
part  of  the  advance  guard  in  this  struggle  are  the 
better  elements  engaged  in  speculative  enter- 
prises.i*  But  in  the  field  of  business  uncertainty, 
as  in  the  shadow  land  of  science,  there  are  found, 
side    by    side    with    honest    investigators,    those 

"  F.  A.  Lange  has  thus  spoken  of  the  effects  of  the  better  sort 
of  speculative  enterprise :  "  Speculation,  though  in  the  first  place 
pursuing  its  own  interests,  has  so  greatly  contributed  to  provide 
Europe  with  the  means  of  communication,  to  regulate  commerce, 
to  give  more  solid  and  real  character  to  business,  to  keep  down  the 
rate  of  interest,  to  extend  and  consolidate  credit,  to  limit  usury,  to 
make  fraud  more  uncommon,  that  no  prince,  no  minister,  no  phi- 
losopher, no  philanthropist,  actuated  by  the  principle  of  self-deny- 
ing activity,  of  benevolent  instruction,  of  wise  legislation,  could 
exert  anything  like  the  same  influence  that  has  been  exercised  by 
the  gradual  removal  of  the  barriers  that  opposed  themselves  to  the 
free  activity  of  the  individual  in  the  feudal  arrangements  of  the 
Middle  Ages." —  "  History  of  Materialism,"  2d  ed.  (Boston,  1879- 
81),  Vol.  Ill,  Sec.  4,  Ch.  I,  p.  252.  Similar  statements  are  made 
by  Wagner  in  "  Rentzsch,"  "  Handworterbuch,"  p.  530. 
168 


CREDIT  AND  SPECULATION 

who  succeed  by  bold  dishonesty  and  cunning  in- 
trigue. 

Speculation  in  its  proper  sphere  tends  directly 
to  prevent  fluctuations  in  price  by  anticipating 
events.  It  softens  the  intensity  with  which  eco- 
nomic forces  work  by  lengthening  the  time  over 
which  their  influence  extends.  Speculation  en- 
forces present  economy  in  the  face  of  probable 
future  want,  and  so  has  been  called  the  best  pre- 
ventive of  famine.  It  permits  present  plenty  in 
the  prospect  of  future  abundance,  and  thus  avoids 
waste  and  extravagance.  It  evens  supply  both 
chronologically  and  geographically,  and  so  directs 
the  energies  of  production  as  to  achieve  the  maxi- 
mum of  ease  and  certainty  afforded  by  the  circum- 
stances governing  the  economic  life.^^ 

It  may  therefore  be  clearly  understood  that  all 

15  Lexis  defines  speculation  as  follows :  "  The  objective  purpose 
of  speculation  is  an  estimate  of  the  probable  future  conditions  of 
the  market,  made  for  the  purpose  of  guiding  to  the  best  purpose 
the  movement  of  goods."  —  Schonberg's  "  Handbuch,"  2d  ed., 
Bd.  II,  Ch.  XXI,  Sec.  46,  p.  727. 

In  agreement  with  this  Michaelis  further  develops  the  idea: 
"  Knowledge  of  the  future  is  profitable  for  trade,  and  is  of  supreme 
importance  for  the  public  good.  To  secure  this  profit  and  advan- 
tage is  the  aim  of  speculation.  If  the  common  investigation,  the 
working  together  of  human  instincts  and  human  minds  which  is 
brought  about  in  speculative  trade,  did  not  find  place,  all  investment 
of  capital  and  all  trade  would  take  on  the  character  of  a  game 
of  chance."  — Faucher's  "  Vierteljahrsschrift,"  Bd.  IV,  pp.  171,  172. 

In  public  finance  the  effect  of  speculative  estimates  is  gradually  to 
change  extraordinary  into  ordinary  expenses.  Cf.  Cohn,  "  Finanz- 
wissenschaft "  (Stuttgart,  1889),  p.  189;  also  Bastable,  "Public 
Finance,"  pp.  124,  125. 

169 


ECONOMIC   CRISES 

that  class  of  operators  whose  influence  upon  the 
market  is  to  increase  or  prolong  fluctuations  of 
market  prices  and  render  conditions  less  rather 
than  more  dependable,  deserves  no  good  name. 
They  are  market  brigands. 

The  perverted  forms  of  speculative  activity  are 
exceedingly  dangerous  to  the  credit  institutions  of 
modern  business.  The  uncertainty  which  inheres 
in  all  speculative  transactions  is  the  fundamental 
element  of  danger  in  them  which  makes  it  neces- 
sary to  guard  carefully  the  delicate  mechanism  of 
credit,  dependent  as  it  is  upon  confidence,  from 
close  alUance  with  them.  The  connection  of  the 
banks  of  New  York  with  the  stock  market,  through 
investments  made  in  call  loans  secured  by  deposits 
of  stock-exchange  securities  made  by  brokers,  has 
several  times  proven  dangerous.  An  editorial  in 
the  "  Washington  Post,"  some  tim.e  since,  affirmed  : 
"  There  is  a  growing  demand  for  the  old-fashioned, 
stingy  banker,  who  is  not  disposed  to  be  accommo- 
dating." It  may  perhaps  be  said  that  our  banks 
could  safely  be  more  liberal  in  the  period  immedi- 
ately succeeding  a  crisis  and  more  conservative  in 
"  prosperous  times,"  when  the  crisis  of  eight  or 
ten  years  back  has  been  forgotten. 

To  this  uncertainty  which  characterizes  spec- 
ulation, there  must  be  added  the  tendency  of 
human  nature  to  overestimate  its  ability  to  pre- 
dict and  its  power  to  control  the  market.  Adam 
Smith  remarked  upon  the  overweening  confi- 
dence   in    their   own    abihties    possessed   by   the 

170 


CREDIT  AND   SPECULATION 

majority  of  men.  This  observation  upon  human 
nature  finds  an  important  application  in  specula- 
tion. It  is  a  blind  confidence  in  one's  ability  to 
read  the  markets  that  furnishes  the  "  lambs  "  of 
the  stock  exchange.  The  same  weakness  from 
time  to  time  brings  down  the  most  expert  oper- 
ators. This  optimism  and  intellectual  pride  is 
most  inopportunely  thrust  into  prominence  at  those 
junctures  where  caution  is  most  desirable,  viz.  in 
deahng  with  uncertainties. 

It  is  asserted  by  operators  that  they  merely  back 
their  own  opinions  and  that  they  take  advantage 
of  the  conditions  of  the  market,  but  do  not  create 
them.  It  is  claimed  that  it  is  a  result  of  the  prin- 
ciple of  the  division  of  labor  that  the  study  of  the 
conditions  of  the  market  is  carried  on  by  a  dis- 
tinct body  of  men  and  thus  a  necessary  task  is 
systematically  performed. ^^  No  occupation  can  be 
justified  which  does  not  render  a  social  service. 
Much  of  the  work  of  the  stock  market  is  use- 
ful and  justifiable.  But  the  justification  of  the 
principle  of  speculation  does  not  excuse  many 
questionable  practices  which  have  become  very 
generally  connected  with  it.  Dealings  in  "fu- 
tures," and  dealings  in  which  no  real  delivery  is 
ever  contemplated,  and  transactions  in  which  the 
sums  deposited  are  so  small  a  proportion  of  the 
total  values  involved  that  vast  personal  interests 
are  made  to  hang  upon  slight  fluctuations  in  the 

1^  Spencer,  "First  Principles"  (New  York,  1873),  p.  479.     Mi- 
chaelis,  in  Faucher's*'  Vierteljahrsschrift,"  1S65,  Bd.  11,  pp.  108,  109. 
171 


ECONOMIC   CRISES 

market  "^"^  render  no  social  service  and  consequently 
have  no  justification.  It  is  by  such  practices  and 
by  the  schemes  of  rings  of  operators  to  manipu- 
late the  management  of  corporations  with  which 
they  are  connected  and  bring  about  the  success  of 
their  private  speculations,  that  the  stock  exchange 
has  gotten  a  hard  name.^^ 

While  the  creation  of  the  stock  market  has 
provided  the  arena  for  the  display  of  the  evils  of 
speculation,  it  has  not  originated  them,  except  in 
the  sense  in  which  one  can  say  private  property 
has  originated  robbery.  The  stock  exchange  pro- 
vides the  economy  of    centralization    just  as  any 

i'^  The  "  London  Economist  "  (Vol.  LII,  Part  I,  p.  418)  con- 
siders that  three-fourths  of  all  transactions  upon  the  stock  exchange 
are  dealings  in  margins. 

Arthur  Crump  says :  "  It  may  be  readily  conceded  that  a  very 
large  number  of  those  who  are  ruined,  or  greatly  injured,  by  stock- 
exchange  speculation,  would  never  operate  at  all  if  they  were 
called  upon  even  to  make  a  deposit  before  the  purchase  was  effected. 
But  when  it  is  considered  that  to  abolish  '  time-bargains '  would  be 
to  ruin  at  once  half  of  the  brokers  in  existence,  the  difficulty  of 
effecting  what  from  one  point  of  view  would  be  a  most  salutary 
change  of  custom,  will  be  understood.  The  great  mischief  is  done 
by  the  facilities  afforded  by  '  time-bargains '  to  operators  who  have 
a  httle  money,  just  sufficient  to  enable  them  to  keep  afloat  as  specu- 
lators in  fair  weather.  The  first  serious  disturbance  that  violently 
agitates  prices  sweeps  them  away  in  a  shoal."  —  "The  Theory  of 
Stock-Exchange  Speculation,"  pp.  3,  4. 

18  Instance  the  proved  venality  of  a  portion  of  the  French  press. 
See  Charles  T.  Congdon,  "The  Adulteration  of  Intelligence," 
"North  American  Review,"  Vol.  CXXXVI,  January,  1883.  Hunt's 
"  Merchant's  Magazine,"  Vol.  VIII,  p.  459.  An  illustration  of  the 
evil  influence  of  speculative  interests  upon  courts  and  legislatures 
is  given  by  C.  F.  Adams  in  "  A  Chapter  on  Erie." 
172 


CREDIT   AND   SPECULATION 

other  market  does.  A  considerable  part  of  the 
transactions  which  take  place  there  are  as  legiti- 
mate as  those  upon  any  other  market.  The  very- 
fact  of  organization,  furthermore,  makes  possible 
a  more  efficient  control  of  speculation  than  would 
otherwise  be  achieved.  Writers  upon  agriculture 
are  urging  that  the  opportunity  of  regulating  the 
conditions  of  stock  raising  which  is  presented  by 
the  concentration  of  business  in  the  stock  yards, 
should  be  seized,  and  that  yard  regulations  be 
formulated  to  suppress  diseases  among  cattle,  and 
to  accomplish  other  desired  ends.  In  an  analo- 
gous way,  the  undesirable  practices  connected  with 
speculation  may  be  repressed  through  the  govern- 
ment of  the  stock  exchange. 

It  may  be  found  desirable  that  stock  exchanges 
should  be  subject  to  public  control,  but  so  long  as 
they  remain  simply  private  associations  their  vol- 
untary regulations  must  be  depended  upon  very 
largely.  The  exchange  may  exercise  a  sharp  scru- 
tiny of  the  persons  admitted  to  its  membership  by 
personal  examinations.  Candidates  for  member- 
ship may  be  required  to  make  a  deposit  to  insure 
conformity  to  the  rules,  as  is  required  in  France, 
or  members  proposing  a  candidate  may  be  obliged 
to  make  such  deposit,  as  in  England.  The  estab- 
lishment of  a  mutual  life  insurance,  amounting  in 
New  York  to  $10,000,  and  forfeitable  upon  failure 
to  comply  with  rules,  exerts  an  obvious  influence. 
In  its  specification  of  what  works  forfeiture  of 
membership,  the  stock  exchange  possesses  great 
173 


ECONOMIC   CRISES 

power  to  define  for  the  business  community  the 
meaning  of  the  terms  "  honorable  "  and  "  dishonor- 
able." A  great  influence  may  also  be  exerted  by 
refusing  to  deal  in  the  securities  of  concerns  known 
to  be  dishonestly  managed. ^^ 

A  few  specific  regulations  designed  to  restrict 
speculation  may  be  mentioned.  Speculation  in 
government  securities  is  made  illegal  in  England 
by  the  provisions  of  "  Sir  John  Bernard's  Act." 
All  dealing  in  options  on  government  securities  is 
prohibited.  "  Bear "  or  "  short "  sales  of  bank 
shares  in  England  were  prohibited  in  1837.  Con- 
tracts made  with  a  view  of  establishing  a  "  corner  " 
on  the  market  are  void  in  the  United  States.  A 
broader  statute  is  that  in  England  against  enhanc- 
ing the  price  of  stocks  to  the  damage  of  the  pur- 
chasing pubhc.  Numerous  enactments  have  been 
passed  both  in  England  and  the  United  States  for 
removing  cognizance  of  law  from  all  gaming  and 
wagering  contracts.  The  German  Empire,  on  May 
19,  1885,  enacted  a  law  levying  a  tax  of  ^i.oo  on 

^9  The  London  stock  exchange  distinguishes  between  brokers 
and  jobbers,  the  latter  not  being  permitted  to  deal  on  their  own 
account,  in  order  that  they  may  be  disinterested  salesmen  of  the 
securities  called  for.  The  applicant  for  membership  is  rigidly 
examined,  and  must  be  guaranteed  in  the  sum  of  five  hundred 
pounds  each  by  two  members  against  default  within  four  years. 
Applicants  must  show  that  they  are  not  engaged  in  any  other  than 
exchange  business,  and  are  not  connected  with  institutions  dealing 
with  stocks.  All  members  are  elected  annually,  and  may  be  re- 
jected on  good  grounds.  General  control  is  in  the  hands  of  an 
executive  committee.  No  members  of  the  exchange  are  permitted 
to  advertise. 


CREDIT   AND   SPECULATION 

every  $10,000  worth  of  stock  transfers  made  upon 
the  stock  exchanges  of  that  country.  The  United 
States  War  Revenue  Act  of  June  13,  1898,  pro- 
vides an  annual  tax  of  fifty  dollars  on  brokers,  a 
tax  of  ten  cents  on  brokers'  notes  or  memoranda 
of  sale  and  a  tax  of  two  cents  on  each  sale  or  agree- 
ment to  sell  stock  amounting  to  one  hundred  dol- 
lars face  value  or  fraction  thereof.  There  is  also 
a  tax  upon  sales  of  merchandise  on  produce  ex- 
changes which  amounts  to  one  cent  for  each  one 
hundred  dollars  of  face  value.  Such  a  tax  is  cal- 
culated to  reduce  the  sensitiveness  of  the  stock 
market.  The  same  effect  may  be  produced  by 
jobbers'  charges  when  it  is  customary,  as  in  Eng- 
land, for  brokers  always  to  deal  with  jobbers. 
These  "  turns  "  or  "  fees,"  ranging  from  one-six- 
teenth to  one-half  per  cent.,  obviously  amount  to  a 
heavy  tax.  Certain  writers  upon  public  finance, 
notably  Adolph  Wagner,  maintain  that  the  taxa- 
tion of  stock-exchange  "deals"  rests  upon  the 
same  basis  as  an  inheritance  tax.  It  rests  upon 
the  principle  that  the  state  is  justified  in  appropri- 
ating a  part  of  those  economic  gains  falling  to 
individuals  because  of  a  peculiarity  in  the  existing 
economic  order,  but  which  are  only  in  a  subordi- 
nate degree  the  result  of  the  recipient's  own  pro- 
ductive exertions. 

After  all  has  been  said,  the  problem  of  credit 

and  speculation  lies  only  in  a  secondary  degree  in 

particulars.     It  consists  rather  in  the  problem  how 

to  produce  that  general  integrity  and  intelligence 

175 


ECONOMIC   CRISES 

of  public  thought  which  will  dictate  the  character 
of  business.^*^  If  this  commercial  public  opinion  is 
properly  developed,  the  problem  of  making  its  force 
felt  in  any  part  of  the  business  field  will  not  be 
exceedingly  difficult,  but  if  it  is  weak  and  insuffi- 

2''  Upon  the  importance  of  public  opinion  Holtzendorff  says : 
"  In  addition  to  tiie  attention  which  the  statesman  always  pays  to 
public  opinion,  the  jurist  must  not  deny  the  fact  that  the  economic 
life  is  strongly  influenced  by  the  state  of  public  opinion;  in  so  far 
that  the  condition  of  public  credit,  the  value  of  paper  money,  and 
the  recurrence  of  economic  crises  seem  dependent  upon  it.  The 
great  stock-exchange  regions  of  the  European  and  American  conti- 
nents are  under  its  influence."  —  "Wesen  und  Werth  der  Oeffent- 
lichen  Meinung,"  p.  ii.  Differences  in  public  opinion  in  various 
countries  he  touches  on  p.  29.  In  regard  to  honor-debts  in  France 
Joseph  Cook  said :  "  French  public  sentiment  so  unflinchingly  con- 
demns a  man  who  acquires  the  name  of  bankrupt,  either  by  rash 
speculation  or  by  purposed  commercial  mischief,  that  it  has  been 
known  again  and  again  that  a  son  would  submit  to  the  most  pinch- 
ing poverty  for  years,  practising  more  than  the  proverbial  French 
thrift,  in  order  to  take  a  stain  off  the  name  of  a  father  .  .  .  Say, 
if  you  please,  that  all  this  is  carrying  this  too  far;  it  remains  true 
that  panics  are  few  in  France,  although  the  spots  on  the  physical 
sun  affect  her  as  much  as  us."  —  "  Boston  Monday  Lectures,"  "  So- 
cialism," pp.  34,  35.  C.  L.  von  Haller,  in  his  "  Restauration  der 
Staatswissenschaften "  (Winterthur,  1820-34),  Bd.  VI,  p.  519, 
shows  that  in  Geneva  for  several  generations  nothing  was  lost 
through  honor-debts  among  the  higher  classes,  because  public 
opinion  closed  positions  of  honor  to  sons  who  left  their  fathers' 
debts  unpaid. 

Some  very  suggestive  material  in  regard  to  the  way  in  which 
honor-debts  are  considered  in  various  countries  is  contained  in  a 
report  upon  "  Debts  of  Honor "  in  the  "  Consular  Report "  for 
August,  1893,  Vol.  XLII.  Cf.  Lalor's  " Cyclopsedia,"  "Commercial 
Crises,"  Vol.  I,  p.  530;  Schaffle  in  "  Tiibinger  Zeitschrift,"  Bd.  XXX, 
1874,  pp.  92,  93;  "British  Quarterly  Review,"  Vol.  LXIII,  Janu- 
ary, 1876,  p.  55. 

176 


CREDIT  AND   SPECULATION 

cient,  technical  and  administrative  hindrances  to 
reform  will  spring  up  hke  giants  on  all  sides.^^  It 
is  in  a  large  measure  due  to  the  strict  integrity- 
enforced  by  public  opinion  in  France  and  Holland, 
and  especially  in  Switzerland,  that  these  countries 
have  kept  so  clear  from  overspeculation  and  eco- 
nomic crises.^     Almost  every  text-book  that  has 

21  Schaffle  ("Deutsche  Vierteljahrsschrift,"  1858,  Heft  I,  pp. 
419,  420)  lays  special  emphasis  upon  freedom,  responsibility,  and 
publicity  as  commendable  for  the  business  as  well  as  for  the  social 
and  political  world. 

By  means  of  the  German  system  of  police  registration  a  man's 
past  business  record  can  be  quickly  gathered  in  detail  when  needed 
for  any  purpose,  as,  for  example,  before  he  is  permitted  to  do  busi- 
ness permanently  in  a  new  city.  The  pressure  exerted  by  such  a 
system  of  police  bookkeeping  is  obvious. 

A  registration  for  this  country  which  would  make  it  possible  to 
locate  the  ownership  of  capital  stock  would  unravel  a  great  many 
mysteries  and  prevent  a  great  deal  of  dishonesty. 

22  The  business  integrity  and  conservatism  which  has  brought 
this  about  in  Switzerland  is  strongly  emphasized  by  Schaffle,  "  Vier- 
teljahrsschrift," 1858,  Heft  I,  pp.  375,  376.  In  a  large  measure  the 
same  applies  to  Holland.  Of  the  Holland  merchants  he  says: 
"  Mynheer  trades  much  with  John  Bull,  has  an  extensive  commerce 
with  Brother  Jonathan,  strong  connections  with  Hamburg,  North 
Germany,  and  Scandinavia,  he  has  banks  and  bankers,  but  remains, 
nevertheless,  usually  intact  on  all  sides,  which  renews  the  proof 
that  not  institutions  nor  environment  condition  the  national  indus- 
trial fortune  or  misfortune  of  a  country,  but  the  self-control  exer- 
cised by  its  people." — pp.  376,  377. 

There  seems  to  be  a  retrogression  noticeable  in  Germany.  On 
this  we  quote  Nasse :  "  We  think  two  points  will  be  granted  by 
every  unprejudiced  student  of  the  moral  life  of  our  nation;  first, 
that  the  enforcement  of  an  objective  moral  law  of  duty  and  moral 
responsibility  until  recently  rested,  among  our  lower  and  niiddle 
classes,  upon  religious  grounds;  secondly,  that  in  the  last  decade 
N  177 


ECONOMIC   CRISES 

had  occasion  to  explain  the  nature  of  credit  has 
brought  clearly  into  prominence  the  fundamental 
truth  that  credit  rests  upon  one  man's  belief  in  the 
ability  and  willingness  of  another  to  meet  his  obli- 
gations. No  discussion  of  an  abuse  of  credit, 
therefore,  can  end  without  at  last  coming  back  to 
the  fundamental  thing,  honesty.  Credit  has  been 
called  a  great  teacher  and  the  discipline  of  com- 
merce is  truly  a  civilizing  force.  If  this  be  true, 
crises  may  be  looked  upon  as  chastisement  for 
mistakes  and  bad  faith.  The  convulsions  of  mod- 
ern business  would  seem  to  indicate  that  the  credit 
structures  which  have  been  raised  in  the  business 
world  are  too  lofty  for  the  basis  of  integrity  we 
have  at  present  to  offer.  The  remedy  lies  at  every 
man's  door.  Civilization  cannot  merely  migrate 
from  country  to  country  as  it  has  done  in  the  past; 
we  must  learn  how  to  intensify  the  economic  and 
social  bonds  without  self-destruction  and  without 
the  increase  of  those  economic  wastes  of  which 
crises  form  a  part. 

RESUME 

I.   Crises  have  appeared  with  the  development  of  credit,  and 
visit  countries  using  credit. 
(a)  Credit  creates  economic  solidarity. 
((5)  Rests  upon  honesty. 
{c)  Uses  of  credit. 

this  foundation  has  been  completely  shattered  with  the  uncultured 
wage- earning  classes,  and  has  not  been  replaced  by  an  equivalent." 
— "  Ueber  die  Verhiitung  der  Produktions-Krisen,"  in  "  Jahrbuch 
fiir  Gesetzgebung,"  Bd.  Ill,  N.  F.,  pp.  162,  163. 

178 


CREDIT   AND   SPECULATION 

Facilitates  transfers  of  capital. 
Makes  investments  easy. 
Saves  money  and  expenses  of  doing  business, 
(f/)  Dangers  of  credit. 

Credit  depends  upon  a  state  of  mind,  —  con- 
fidence. 
May  support  extravagance  and  unwise  invest- 
ments. 
Lessens  the  money  reserve. 
Lengthens   and  complicates    pecuniary   obliga- 
tions. 
The  underestimation  of  the  future, 
(i?)   Safeguards. 

Short-time  credits. 

Punctuality. 

Sharp  definition  of  the  moral  aspect  of  risking 

loss  of  another's  money. 
Conservatism  in  optimistic  times. 
Disentanglement  from  speculative  businesses. 
Maintain  the  '"standard  of  credit." 
Scrutiny  of  the  first  credit  advances. 
II.    Speculation  coupled  with  credit  becomes  dangerous. 
(a)  Definition. 

Speculation  in  the  broad  sense. 
Gambling,  distinct  from  speculation,  —  charac- 
teristics of  each. 
■'-       (d)  Service  of  speculation. 

Lessens  the  domain  of  uncertainty. 
Prevents  price  fluctuations. 
(^)  Dangers. 

Alliances  of  banks  with  stock  market  dangerous. 
Overestimation  of  one's  ability. 
Dealings  in  "futures." 
(d)  The  functions  of  the  stock  market,  —  control  pos- 
sible through  it. 
III.   The  abuse  of  credit  and  speculation  is  primarily  a  moral 
problem. 

179 


CHAPTER   IX 

THE   PSYCHOLOGY  OF  CRISES 

Political  economy  is  in  an  important  sense 
applied  psychology.  As  this  science  treats  of  a 
portion  of  the  social  activity  of  men,  it  must  re- 
ceive as  a  part  of  its  premises  the  statement  of  the 
psychologist  regarding  the  individual  and  social 
psychology  of  man,  and  apply  it  in  the  explana- 
tion of  economic  society. 

As  we  have  already  seen,  the  causes  of  economic 
crises  are  numerous.  No  sufficient  explanation  of 
them  can  be  made  which  does  not  take  into  account 
the  working  of  the  industrial  and  legal  machinery 
which  society  employs  in  achieving  its  purposes, 
but  neither  can  any  view  of  crises  be  sufficient 
which  leaves  out  of  account  the  human  nature 
operating  through  this  machinery  and  exhibiting 
itself  in  it.  Thus  far,  few  writers  have  touched  in 
any  adequate  way  upon  this  aspect  of  the  subject, 
although  there  are  not  lacking  numerous  assertions 
that  its  study  is  necessary  and  fundamental.  Mr, 
John  Mills,  who,  in  his  pamphlet  entitled  "  Credit 
Cycles,"  has  contributed  more  than  any  other  per- 
son to  this  part  of  the  theory,  says,  "  The  subject 
of  commeicial  fluctuations  will  acquire  a  new  dig- 
i8o 


THE   PSYCHOLOGY   OF   CRISES 

nity  if  it  be  found  striking  its  roots  far  below  the 
level  of  its  physical  particulars,  and  proving  itself 
cognate  with  the  sciences  of  mind."^  In  similar 
vein  Yves  Guyot  expresses  himself  :  "  In  economy, 
as  in  all  other  social  phenomena,  psychological 
facts  play  an  important  part.  It  is  because  they 
have  not  been  sufficiently  taken  into  account  that 
we  have  had  so  many  erroneous  explanations  of 
commercial  crises."  ^  In  the  explanation  of  the 
depression  which  follows  a  crisis,  Horace  White 
observes  :  "  The  pendulum  will  swing  back  in  time 
—  these  undulations  of  trade,  of  alternately  high 
and  low  prices,  of  alternate  activity  and  depression 
in  business,  have  their  root  in  the  mental  and  moral 
constitution  of  mankind."  ^  Interest  has  been 
taken  in  these  aspects  of  the  subject  by  William 
Langton,  and  by  the  Italian  economist  Catteneo,  as 
well  as  by  the  chroniclers  of  similar  phenomena, 
Charles  Mackay,  Isaac  Taylor,  and  C.  F.  Adams. 
But  the  literature  of  crises  scarcely  brings  us  fur- 
ther than  such  general  statements  as  have  been 
just  quoted. 

It  is  intended  in  this  discussion  to  place  before 
the  reader  an  outline  of  what  are,  in  the  estimation 
of  the  writer,  the  chief  psychological  phenomena 
of  crises. 

A  word   may  be  prefixed  regarding  the  chief 

1  "Credit  Cycles,"  p.  13. 

2  •'  Principles  of  Social  Economy  "  (translated  by  Lippington) 
2d  ed.,  Ch.  Ill,  p.  239. 

8  Lalor,  " Cyclopsedia,"  "Commercial  Crises,"  Vol.  I,  p.  524. 
181 


ECONOMIC   CRISES 

theories  of  crises  now  accepted,  considering  them 
from  the  point  of  view  of  their  psychology.  Some 
sort  of  a  psychology  is  of  necessity  assumed  by 
writers  upon  social  subjects,  and  consequently  by 
those  who  have  constructed  theories  to  explain 
crises.  This  fundamental  psychology  is  frequently 
in  the  literal  sense  an  assumption,  being  adopted 
without  careful  thought.  It  is  consequently  often 
inconsistent  or  at  least  weak  and  defective.  Those 
socialists  who  explain  crises  as  a  part  of  an  inevi- 
table evolution  of  industry,  and  who  hold  the  ma- 
terialistic philosophy  of  history,  subordinate  the 
consideration  of  all  moral  forces  to  the  evolution 
of  the  technique  of  industry.  The  pictures  which 
they  draw  contrasting  the  depravity  of  the  present 
with  future  perfectibility,  rest  upon  the  assumption 
of  a  plastic  human  nature ;  an  assumption  which 
their  ironically  critical  attitude  and  urgent  moral 
appeals  belie. 

The  wages  theory  of  crises  enunciated  by  Rod- 
bertus  presents  a  curious  picture  of  society  when 
looked  at  from  the  point  of  view  of  its  psychology. 
It  shows  us  a  wage-earning  population,  frugal  and 
industrious,  producing  a  surplus  beyond  what  is 
needed  to  satisfy  its  needs,  yet  permanently  held 
down  through  the  power  of  capital  by  a  class  pos- 
sessing neither  frugality  nor  the  abihty  to  guide 
properly  the  industrial  forces  in  their  charge.  The 
implication  is  that  the  relation  between  capacity 
and  achievement  can  be  completely  sundered. 

When  credit  is  discussed  in  connection  with 
182 


THE   PSYCHOLOGY   OF   CRISES 

crises,  it  leads  through  the  defects  of  social  prac- 
tice almost  immediately  to  the  consideration  of  the 
indicated  defects  of  human  nature.  It  points  to 
an  intense  ambition  to  be  rich  which  leads  to  the 
overuse  of  credit  instrumentalities  in  building  up 
business,  and  to  a  lack  of  keenness  in  ethical  dis- 
crimination in  realizing  the  ethics  of  risking  the 
loss  of  another  person's  money.  It  indicates  an 
inabihty  to  realize  fully  the  force  of  future  obliga- 
tions, and  overconfidence  in  one's  judgment  and 
economic  strength  leading  to  the  overtaxing  of 
one's  economic  power  and  hence  to  failure. 

In  the  discussions  of  this  chapter  let  us  examine 
the  psychological  elements  of  crises  directly  and 
for  their  own  sake  and  not  merely  as  an  adjunct 
to  some  other  explanation. 

The  general  characteristics  of  crises  are  already 
sufficiently  familiar.  They  may  be  reviewed  briefly 
in  the  words  of  Lord  Overstone,  "  State  of  quies- 
cence, improvement,  growing  confidence,  prosper- 
ity, excitement,  overtrading,  convulsions,  pressure, 
stagnation,  distress,  ending  again  in  quiescence." 
This  description  presents  to  us  a  succession  of 
stages  through  which  business  passes  during  the 
complete  crisis-period.  For  each  of  these  stages 
there  is  a  special  and  characteristic  mental  state. 
Each  stage  indicates  a  view  taken  of  the  course  of 
trade  and  of  business  prospects  generally.*  The 
general  change  which  marks  the  progress  up  to 

*  John  Mills,  "  Credit  Cycles,"  p.  17. 
183 


ECONOMIC   CRISES 

the  crisis  is  a  gradual  growth  of  optimism.  There 
accompanies  this  a  gradual  increase  in  activity  and 
a  perceptible  and  constant  quickening  of  interest 
worthy  in  its  later  stages  to  be  called  a  profound 
emotion.  With  this,  as  the  pre-crisis  period  ad- 
vances, comes  a  decline  of  criticism  and  an  increas- 
ingly unsound  business  judgment.  These  changes 
give  expression  to  themselves  by  what  appears  to 
be  a  rapidly  expanding  business  in  which  an  in- 
creasing use  is  made  of  credit  in  all  forms.^  The 
activity  noticeable  before  a  crisis  is  a  function  of 
the  feeling  of  confidence  prevailing,  for  the  simple 
reason  that  when  people  who  want  money  believe 
it  is  being  made,  they  redouble  their  exertions  to 
get  it.  This  leads  to  the  vis  a  tergo  behind  the 
whole  process,  which  is  the  desire  for  wealth.  It 
is  this  constantly  operating  force  which  erects  the 
economic  machinery  destroyed  in  the  crisis  and 
which  operates  it  in  such  a  way  as  to  lead  to  the 
crisis. 

The  question  arises.  Why  does  the  desire  for 
wealth  miscarry  in  satisfying  itself  and  lead  to 
such  wastes  as  are  involved  in  a  crisis }  We  know 
that  a  gradually  approaching  prospect  of  satisfy- 
ing a  desire  excites  emotion.      A  piece  of  good 

^  Macleod,  speaking  of  the  growth  of  unsound  credit,  says: 
"  Such  quantities  of  credit  cannot  accumulate  in  a  day.  A  certain 
time  is  required  under  ordinary  circumstances  to  produce  a  crisis, 
just  as  a  certain  time  is  necessary  to  generate  an  abscess  or  a  tumor 
in  the  human  body."  —  "Theory  of  Credit,"  Vol.  II,  Part  II,  Ch. 
XVI,  Sec.  20,  p.  724. 

184 


THE   PSYCHOLOGY   OF  CRISES 

fortune  happening  to  one  person  which  brings  near 
the  prospect  of  wealth  to  others  will  often  craze 
an  entire  industrial  community.  This  is  well  illus- 
trated by  the  history  of  prospecting  for  metals. 
In  California,  after  the  first  discoveries  in  1849,  the 
state  was  searched  from  end  to  end  for  gold.  The 
reported  finding  of  a  ledge  of  pure  silver  brought 
on  a  craze  for  silver  in  1858-59.  When  a  rich  but 
shallow  vein  of  copper  was  discovered  at  Copper- 
opolis  in  Calaveras  County  in  i860,  a  copper  mania 
was  inaugurated  which  culminated  in  1863.  Dur- 
ing the  great  oil  speculations  in  Pennsylvania  a 
petroleum  fever  seized  the  state.^  Now  it  is 
equally  well  known  that  a  high  state  of  feehng 
precedes  and  accompanies  a  crisis  and  slowly  sub- 
sides after  it.  The  existence  of  these  stages  of 
feeling  gives  us  the  hint  to  examine  the  effect 
which  the  concentration  of  desire  in  an  extraordi- 
nary degree  upon  an  object  and  the  accompanying 
of  this  with  strong  feelings  have  upon  the  judgment 
and  the  conduct. 

In  examining  the  influence  of  such  a  mental 
state,  we  shall  find  it  convenient  first  to  consider 
the  individual  psychology,  then  the  social  psychol- 
ogy. And  we  shall  begin  by  distinguishing  the 
effect  of  strong  desire  accompanied  by  emotion 
upon  the  interpretation  of  matters  of  recollection 
and  upon  anticipations.  The  guiding  principle  is 
this :    a  powerful  emotion  tends  to  bring  all  the 

6  H.  H.  Bancroft,  "  History  of  California,"  Vol.  VII. 
185 


ECONOMIC   CRISES 

operations  of  the  mind  into  harmony  with  itself 
and  to  banish  from  the  mind  all  considerations 
out  of  harmony  with  itself.  This  unbalancing  of 
the  mind  leads  to  destructive  individual  and  social 
activity. 

First,  then,  turning  our  attention  to  the  psy- 
chology of  the  individual,  let  us  note  the  effect  of 
a  powerful  desire  upon  recollection.  It  exhibits 
itself  in  four  ways  which  may  be  here  distin- 
guished, {a)  The  force  of  the  original  impression 
which  is  later  to  be  recalled,  depends  upon  what 
our  interest  in  the  matter  was  at  the  time  and 
what  our  appreciation  of  the  significance  of  the 
occurrence  was.  We  do  not  see  things  as  they 
are,  but  as  they  appear  through  the  media  of  our 
education  and  interests.  As  James  Sully  says : 
"  Recollection  is  a  selective  process,  and  this  truth 
is  strikingly  illustrated  in  the  growth  of  our  endur- 
ing representations  of  things.  What  stamps  it- 
self on  my  memory  is  what  surprises  me  or  what 
deeply  interests  me  at  the  moment."  ''  (d)  There 
is  a  tendency  to  confuse  the  recollection  of  exter- 
nal actualities  with  that  of  subjective  states  due 
to  imagination  and  desire.  The  tendency  is  to 
assume  in  recollection  that  all  impressive  mental 
states  result  from  a  sufficient  external  cause.  An 
example  of  this  given  by  one  psychologist  is  as 
follows:  One  dreams  of  seeing  snow  fall.  He 
awakens   and    sees   snow   lying    on    the    ground. 

''  "  Illusions,"  p.  314, 
186 


THE  PSYCHOLOGY  OF  CRISES 

Later  he  asserts  that  he  saw  it  fall  and  saw  it 
lying  on  the  ground.  The  more  frequently  this 
assertion  is  made,  the  more  invincible  will  become 
the  belief.  A  further  illustration  may  be  found  in 
the  memories  of  liars.  It  is  well  known  that  pre- 
varication rapidly  confuses  and  distorts  one's  rec- 
ollections so  that  even  with  the  best  of  intentions 
a  return  to  the  truth  becomes  difficult  for  a  chronic 
liar,  if  not  well-nigh  impossible,  (c)  There  is  a 
continual  selection  of  details  in  the  act  of  recall- 
ing. If  we  have  been  influenced  by  strong  desires, 
we  have  been  recalling  and  dwelling  upon  such 
matters  as  have  harmonized  with  these  desires. 
The  sharpness  and  vividness  of  an  act  of  recalling 
depends  upon  how  frequently  the  matter  has  been 
recalled.  Thus  one  becomes  more  convinced  in 
regard  to  a  matter  as  it  passes  into  memory.  A 
theory  to  explain  the  circumstance  is  formed. 
The  recollection  of  details  not  agreeing  with  or 
fitting  into  this  theory,  and  at  first  easy,  fades  little 
by  little,  leaving  only  such  details  as  are  custom- 
arily recalled  because  they  correspond  with  the 
views  we  have  taken.  The  selective  process 
makes  firmer  the  view  first  taken,  whatever  that 
may  be.  Matters  which  are,  as  we  say,  banished 
from  recollection  tend  to  fall  out  of  mind  entirely. 
The  operations  of  the  selective  memory  may  be 
traced  in  some  parents  who  out  of  the  details  of 
the  lives  of  their  children  choose  elements  which 
form  a  picture  of  winning  and  precocious  childhood, 
while  their  neighbors  may  retain  recollections  of 
187 


ECONOMIC   CRISES 

an  entirely  different  sort.  A  somewhat  analogous 
process  is  that  social  one  by  which  a  nation  little 
by  little  constructs  from  the  life  of  a  departed 
leader  the  picture  of  an  all-round  hero,  {d)  Finally, 
at  any  moment  of  recollection  the  tendency  is,  if 
one  is  influenced  by  a  strong  desire,  to  permit  only 
such  recollections  to  develop  themselves  and  ab- 
sorb the  attention  as  harmonize  with  the  present 
state  of  mind. 

This  distortion  of  recollection,  performed  in  the 
ways  which  we  have  enumerated,  tends  to  destroy 
the  basis  of  sound  judgment.  In  falsifying  memory 
it  renders  nugatory  the  results  of  experience. 

The  effect  of  a  strong  desire  upon  expectation 
is  equally  remarkable.  In  an  act  of  anticipation 
the  judgment  is  to  a  certain  extent  freed  from  the 
correctives  and  checks  which  restrain  us  from 
error  in  realizing  the  present  and  recalling  the 
past.  There  is  thus  range  for  a  greater  degree 
of  error  due  to  prejudice.  And  these  errors  may 
everywhere  be  observed  in  acts  of  anticipation. 
The  mind  tends  to  restore  the  equilibrium  between 
pain  and  pleasure  and  to  renew  its  vigor  by  con- 
trasting the  expectation  of  a  pleasing  future  — 
the  "joys  of  hope  "  —  with  a  dismal  past  or  unsatis- 
factory present.  In  so  far  as  the  course  of  the 
future  is  uncertain,  our  beUefs  regarding  it  are 
likely  to  be  formed  according  to  our  desires.  We 
know  that  subjective  states  exercise  more  control 
over  the  imagination  than  over  any  other  activity 
of  mind.  The  field  of  imagination  lies  close  to 
i88 


THE   PSYCHOLOGY   OF  CRISES 

that  of  expectation.  In  so  much  as  the  tendency 
of  imagination  is  to  picture  what  is  desired,  opti- 
mism characterizes  one's  views  of  the  future  gen- 
erally. This,  according  to  an  authority  upon 
stock  markets,  characterizes  the  speculator.  "  The 
most  brilliant  good  fortune  which  may  result  from 
the  operations  of  a  speculator  generally  fall  below 
his  anticipations,  when  the  operations  are  reduced 
to  figures.  It  appears  that  the  imagination  gets, 
as  it  were,  diseased  by  feeding  on  the  contempla- 
tion of  very  rapid  gains ;  and  that  whatever  may 
be  the  reality  of  a  hypothetical  gain,  the  mind  gets 
bewildered  and  fails  to  estimate  as  an  element  of 
loss  the  surrounding  husks  in  which  the  fruit  is 
enclosed."  ^  What  we  may  logically  expect  in  the 
future,  from  analogy  with  the  past,  is  not  what  we 
do  actually  expect.  We  all  know  that  a  person 
plans  for  a  certain  period  of  the  future  more  work 
than  he  will  be  able  to  accomplish.  A  man  pic- 
tures to  himself  greater  success  and  happiness  than 
is  likely  to  be  his  actual  lot.  And  this  results  in 
considerable  part  from  the  influence  of  an  absorb- 
ing desire.  What  is  vividly  imagined  and  intensely 
desired  tends  to  become,  little  by  little,  a  matter 
not  only  wished  for,  but  planned  for,  and  finally 
expected  with  more  and  more  confidence.  All  this 
may  take  place  without  the  addition  of  any  new 
confirming  objective  reality.^     Shakespeare  often 

*  Arthur  Crump,  "Theory  of  Stock-Exchange  Speculation,"  p.  3. 
^  Upon  this  source  of  error  in  expectation  Sully  says,    "  Even 
supposing  the  expectation  to  have  originated  from  some  rational 
189 


ECONOMIC    CRISES 

put  his  finger  upon  this  weakness  of  human  char- 
acter. When  Prince  Henry,  supposing  his  father 
dead,  takes  the  crown  from  the  brow  of  the  sleep- 
ing king,  and  his  father  calls  him  to  account,  the 
prince  says,  "  I  never  thought  to  hear  you  speak 
again."  The  king  responds,  "Thy  wish  was 
father,  Harry,  to  that  thought."  ^^  Similarly  Caesar 
in  his  Gallic  Wars  says :  "  Multae  res  ad  hoc  con- 
silium Gallos  hortabantur :  superiorum  dierum 
Sabini  cunctatio,  perfugae  confirmatio,  inopia  ci- 
bariorum,  cui  rei  parum  diligenter  ab  iis  erat  pro- 
visum,  spes  Venetici  belli,  et  quod  f^-re  libeiiter 
Jioniines  id,  qtiod  voliint,  credicnt."  Young  said, 
"What  we  ardently  wish  we  soon  believe,"  and 
Bacon,  "  Men's  thoughts  are  much  according  to 
their  inclination,"  ^^  and  again  in  Novum  Organum, 
Lib.  I,  Aph.  XLIX,  "  Quod  mavult  homo  verum 
esse,  id  potius  credit."  Lester  F.  Ward  has  well 
stated  the  same  truth  :  "  The  reason  is  perpetually 
called  upon  to  subdue  extravagant  expectations. 
Even    in    man    those   individuals    are  rare  whose 

source,  as  from  a  conscious  inference  from  past  experience,  or  from 
the  acceptance  of  somebody's  statement,  the  very  habit  of  cherish- 
injT  the  anticipation  tends  to  invest  it  with  an  automatic  self-suffi- 
cient character."  —  "Illusions,"  p.  302.  And  again  he  says,  on 
p,  306 :  "  There  are,  I  conceive,  good  reasons  for  saying  that  any 
kind  of  vivid  imagination  tends  to  pass  into  a  semblance  of  an 
expectation  of  a  coming  personal  experience,  or  an  event  that  is 
about  to  happen  within  the  sphere  of  our  own  observation.  It  has 
long  been  recognized  by  writers,  among  whom  I  may  mention 
Dugald  Stewart,  that  to  distinctly  imagine  an  event  or  object  is  to 
feel  for  the  moment  a  degree  of  belief  in  the  corresponding  reality." 
10  "  Henry  IV,"  Part  II,  Act  IV,  Sc.  IV.  "  "  Essays,"  XXXIX. 
190 


THE   PSYCHOLOGY  OF   CRISES 

judgments  are  of  any  value  against  their  interests. 
Prediction  of  results  is  in  most  cases  nothing  better 
than  betrayal  of  preferences.  Men  as  a  rule 
believe  that  that  will  happen  which  they  wish  to 
happen.  .  .  .  No  one  is  capable  of  balancing 
the  profits  and  losses  of  life.  The  lower  in  the 
scale  of  intelligence  the  more  complete  this  inca- 
pacity." ^^  This  optimistic  picturing  of  the  future 
leads,  in  passive  natures,  to  "  waiting  for  some- 
thing to  turn  up,"  and  in  strong  natures  to  various 
forms  of  ill-advised  activity. 

The  application  of  this  to  the  subject  of  crises 
comes  through  the  study  of  the  effect  which  an 
intense  desire  to  accumulate  wealth  will  have  upon 
the  conduct  of  the  individual  in  economic  matters. 
The  active  and  energetic  and  self-reliant,  who 
naturally  become  the  leaders  in  industrial  society, 
are  of  the  intellectual  type  most  prone  to  optimistic 
exaggeration.^^  Experience  proves  that,  to  the 
optimistic,  gambling  is  particularly  easy.^*  Certain 
it  is  that  credulity  begets  extravagance  and    fur- 

12  "The  Psychic  Factors  in  Civilization,"  p.  66,  Boston,  1893. 
See  also  "  Literary  Remains  of  the  Late  William  Hazlitt,"  Essay 
IV,  "  Belief  whether  Voluntary,"  New  York,  1836. 

13  Commenting  upon  the  cause  of  the  crisis  of  1857,  Wagner 
says :  "  The  chief  blame,  in  our  opinion,  should  be  laid  to  the  wild 
'  go-ahead '  spirit  of  the  Yankee.  The  matter  was  on  this  occa- 
sion made  especially  easy  by  the  indiscreet  and  overplentiful  offer 
of  credit  made  by  Europe,  namely,  England  and  Germany."  — 
"Die  Geld- und  Credit-theorie  der  Peel'schen  Bankacte,"  p.  263. 

1*  Cf.  James  Oliphant,  "  Westminster  Review,"  "  The  Ethics  of 
Gambling,"  Vol.  CXXXVII,  pp.  521,  522. 
191 


ECONOMIC   CRISES 

nishes  the  harvest  for  fraud.^^  The  exaggeration 
of  economic  prospects  begets  not  only  activity,  but 
falsely  directed  activity,  the  result  of  which  is  to 
erect  a  commercial  structure  which  at  some  point 
in  its  building  up  must  fall  with  disastrous  ruin 
because  of  its  inherent  error.  If  too  much  of  our 
thought  and  interest  is  concentrated  upon  the 
struggle  for  wealth  and  our  reasoning  holds  true, 
we  have  the  explanation  of  the  optimism  ^^  and  reck- 
lessness which  may  be  seen  in  pre-crisis  periods 
preparing  the  conditions  for  a  future  crash.  That 
such  an  overconcentration  of  interest  in  material 
wealth  as  will  bring  on  these  results  does  exist  in 
the  chief  nations  which  have  passed  into  the  stage 
of  industrial  freedom  is  a  matter  of  most  positive 
affirmation  on  the  part  of  many  of  the  most  in- 
fluential thinkers  of  our  day.     It  would  be  indeed 

IS  "The  good  times,  too,  of  high  price  ahnost  always  engender 
much  fraud.  All  people  are  most  credulous  when  they  are  most 
happy;  and  when  much  money  has  just  been  made,  when  some 
people  are  really  making  it,  when  most  people  think  they  are  mak- 
ing it,  there  is  a  happy  opportunity  for  ingenious  mendacity. 
Almost  everything  will  be  believed  for  a  little  while,  and  long 
before  discovery  the  worst  and  most  adroit  deceivers  are  geo- 
graphically or  legally  beyond  reach  of  punishment,"  —  Bagehot, 
"  Lombard  Street,"  "Works,"  Vol.  V,  p.  103. 

^•^  Lord  Overstone  founded  crises  in  human  nature,  "  So  long  as 
human  nature  remains  what  it  is,  and  hope  springs  eternal  in  the 
human  breast,  speculations  will  occasionally  occur,  and  bring  with 
them  their  attendant  train  of  alternate  periods  of  excitement  and 
depression.  Storms  and  tempests  are  not  more  certain  and  inevi- 
table in  the  material  world  than  are  the  periodical  convulsions  of 
commercial  affairs;  and  they  both  answer  similarly  useful  pur- 
poses," —  "  Management  of  the  Circulation,"  "  Tracts,"  pp.  131,  132, 
192 


THE   PSYCHOLOGY  OF  CRISES 

strange  if  it  could  be  shown  that  the  passion  for 
the  accumulation  of  wealth  not  only  robs  social 
life  of  many  of  the  nobler  forms  of  enjoyment,  but 
defeats  itself  in  its  purely  utilitarian  purpose  not 
only  through  the  neglect  of  the  art  of  consuming 
wealth,  but  through  the  misadjustment  of  produc- 
tion and  the  destruction  wrought  by  economic 
crises. 

The  belief  that  this  is  true  is  fortified  by  history, 
which  shows  that  an  undue  concentration  of  inter- 
est on  other  than  economic  matters  has  been  fol- 
lowed by  social  maladies  in  many  ways  analogous 
to  crises.  It  has  been  asserted  that  the  New  Eng- 
land religious  epidemics  and  witchcraft  scares  were 
the  result  of  an  undue  concentration  of  thought 
along  the  lines  of  religious  contemplation.  Prof. 
C.  F.  Adams,  after  describing  the  terroristic  type 
of  theology  and  preaching  accepted  in  New  Eng- 
land, says  :  "  It  would  have  been  inconsistent  with 
any  accepted  theory  of  human  nature  that  the 
moral  conditions,  continually  and  systematically 
developed  by  the  treatment  which  had  been  pre- 
scribed, should  not  periodically  have  broken  out 
in  phases  of  acute  mania.  At  first  the  acute  at- 
tacks of  the  mania  took  the  forms  of  ordinary  reli- 
gious persecutions,  finding  vent  against  Baptists  and 
Quakers ;  then  it  assumed  a  much  more  interest- 
ing phase  in  the  Salem  Witchcraft  craze  of  1691-92. 
The  New  England  historians  have  usually  re- 
garded this  curious  and  interesting  episode  as  an 
isolated  phenomenon,  to  be  described  as  such,  and 
o  193 


ECONOMIC   CRISES 

then  palliated  by  reference  to  the  far  more  fero- 
cious and  unthinking  maniacal  outbreaks  of  like 
nature  in  other  lands  at  about  the  same  time. 
This  is  simply  to  ignore  its  significance.  .  .  .  The 
mania  of  1691-92  in  Massachusetts  was  no  isolated 
or  inexplicable  manifestation  ;  on  the  contrary,  it 
was  a  most  noticeable  instance  of  the  operation  of 
law."  1' 

These  epidemics  developed  at  about  equal  inter- 
vals of  time  from  one  another,  and  later  under 
somewhat  changed  conditions  gave  place  to  a  simi- 
lar succession  of  revivals.^^  The  series  was  broken 
up  when  a  new  interest  was  created  in  the  Revolu- 
tionary War,  though  in  some  instances  the  reli- 
gious epidemics  reappeared  later.  Crises  and 
religious  epidemics  are  ahke  evidences  of  unbal- 
anced interests.  Similarly  the  undue  concentration 
of  interest  upon  political  matters,  as  in  Greece  and 
the  South  American  states  and  in  France,  has  been 
conducive  to  instability  of  government  rather  than 
the  reverse.  A  further  evidence  that  crises  are 
the  result  of  an  undue  concentration  of  interest 
upon  economic  affairs  is  offered  by  the  fact  that 
when  war  absorbs  the  interest  of  a  people,  the  cri- 
sis cycle  frequently  lapses.  The  same  thing  has 
been  noticed  in  the  relation  between  crises  and 
political  elections.  The  suggestion  of  this  is 
apparent.     If   v/e  could   cultivate  other    interests 

"  "  Massachusetts,"  p.  85.  See  also  R.  G.  Thwaites,  "  The  Colo- 
nies," p.  191  ff. 

18  C.  F.  Adams,  "  Massachusetts,"  p.  89. 
194 


THE   PSYCHOLOGY  OF  CRISES 

sufficiently  to  right  the  intellectual  balance,  the  cri- 
sis period  might  lapse  indefinitely. 

We  have  seen  that  a  strong  desire  exercises  a 
greater  influence  over  acts  of  recollection  and 
expectation  than  over  the  simple  primary  judg- 
ments of  the  present.  Our  industrial  age,  produc- 
ing wealth  as  it  does  by  means  of  long-enduring  and 
complex  processes,  brings  into  the  closest  relations 
the  economic  past  and  future  with  the  present. 
Our  methods  of  production  fit  us  into  a  chain  of 
influences  and  activities  which  was  begun  in  the 
past  and  for  the  consummation  of  which  we  must 
look  to  the  future.  Expectation  and  forecast  play 
a  more  important  economic  role  to-day  than  ever 
before,  and  business  demands  the  exercise  of  those 
intellectual  faculties  which  are  most  distorted  by 
an  overdeveloped  desire  for  wealth. 

We  have  seen  that  desire  will  largely  shape  expec- 
tation where  objective  data  for  judgment  are  defec- 
tive and  the  matter  is  involved  in  uncertainty.  It  is 
not  necessary  to  assert  that  the  course  of  modern 
business  is  uncertain  in  the  extreme.  As  business 
ventures  must  be  based  on  future  contingencies, 
as  the  market  widens,  and  the  number  of  competi- 
tors increases,  uncertainty  must  increase.  This  was 
sufficiently  enlarged  upon  in  the  chapter  on  "The 
Organization  of  Industry."  Those  lines  of  business 
which  have  been  conspicuous  for  their  uncertainty 
have,  many  of  them,  been  conspicuous  also  for  the 
crises  suffered  in  them.  An  element  of  uncer- 
tainty is  prominently  connected  with  most  crises. 

195 


ECONOMIC   CRISES 

In  1 719,  in  France,  at  the  time  of  the  Mississippi 
Scheme,  the  issue  was  upon  the  probable  future 
value  of  an  exclusive  privilege  given  by  France  to  a 
company  to  trade  in  the  little  known  region  of  the 
East  Indies,  China,  and  the  South  Seas.  In  1720, 
in  England,  it  was  upon  the  probability  that  the 
South  Sea  Company  would  obtain  exclusive  grants 
of  trading  privileges  from  Spain,  and  as  to  the 
value  of  these.  In  Holland,  from  1634-36  the  uncer- 
tainty was  what  the  demand  of  the  world  would  be 
for  certain  varieties  of  tulips.  The  industry  of  the 
present  finds  the  requisite  degree  of  uncertainty 
in  the  complex  conditions  which  determine  the 
course  of  the  world's  markets.  Foreign  trade  has 
always  been  noted  for  its  uncertainties,  and  it  has 
been  equally  noted  for  the  extravagancies  which 
have  been  connected  with  it. 

There  seems  to  be,  in  the  human  mind,  a  neces- 
sity for  a  belief  or  theory  of  some  sort  and  an 
unwillingness  to  keep  the  mind  in  suspense  for 
more  data.^^     Therefore  a  temporizing,  conserva- 

1^  A  very  remarkable  analysis  of  the  beliefs  arising  during  the 
process  of  gambling  is  given  in  the  following  extract  from  an  arti- 
cle which  appeared  in  the  "  Spectator,"  October  4,  1873,  and  which 
is  quoted  at  length  in  Arthur  Crump's  "Theory  of  Stock- Exchange 
Speculation,"  pp.  52,  53:  "And  what  was  that  experience?  This 
chiefly,  —  that  I  was  distinctly  conscious  of  partially  attributing  to 
some  defect  or  stupidity  in  my  own  mind  every  venture  on  an 
issue  that  proved  a  failure;  that  I  groped  about  within  me  for 
something  in  me  like  an  anticipation  or  warning  (which,  of  course, 
was  not  to  be  found)  of  what  the  next  event  was  to  be,  and  gener- 
ally hit  upon  some  vague  impulse  in  my  own  mind  which  deter- 
mined me;  that  whenever  I  succeeded,  I  raked  up  my  gains  with 
196 


THE   PSYCHOLOGY  OF  CRISES 

tive,  and  restraining  policy  is  easily  forsaken  for 
one  which  embodies  an  optimistic  theory,  and  the 
error  of  a  theory  cannot  at  once  be  made  appar- 
ent. The  organization  of  business  is  now  such 
that  it  does  not  furnish  an  immediate  check  to 
unwise  activities.  The  system  is  one  which  per- 
mits the  inflations  of  values  and  an  overdraft  of 
credit  for  a  period  long  enough  to  give  an  impe- 
tus to  such  undertakings  and  give  an  unfounded 
feeling  of  success^*'  to  operators  who  may  be,  as  a 
matter  of  fact,  on  the  straight  road  to  disaster. 

a  half-impression  that  I  had  been  a  clever  fellow  and  had  made  a 
a  judicious  stake,  just  as  if  I  had  really  moved  a  skilful  move  at 
chess;  and  that  when  I  failed,  I  thought  to  myself:  Ah,  I  knew 
all  the  time  I  was  going  wrong  in  selecting  that  number,  and 
yet  I  was  fool  enough  to  stick  to  it;  which,  of  course,  was  a  pure 
illusion,  for  all  I  did  really  know  was  that  the  chance  was  even,  or 
much  more  than  even,  against  me.  But  this  illusion  followed  me 
throughout.  I  had  a  sense  of  deserving  success  when  I  succeeded, 
and  of  having  failed  through  my  own  wilfulness,  or  wrong-headed 
caprice  of  choice,  when  I  failed.  .  .  .  When  you  win  at  one  time, 
and  lose  at  another,  the  mind  is  almost  unable  to  realize  steadily 
that  there  is  no  reason  accessible  to  yourself  why  you  won  and 
why  you  lost.  And  so  you  invent  —  what  you  know  perfectly  well 
to  be  a  fiction  — the  conception  of  some  sort  of  inward  divining  rod 
which  guided  you  right  when  you  used  it  properly,  and  failed  only 
because  you  did  not  attend  adequately  to  its  indications." 

20  Natural  optimism  is  sufficient  in  many  instances  to  account  for 
this  feeling  of  success.  "  There  has  never  been  a  successful  gam- 
bler who  has  not  believed  that  his  success  (temporary  though  such 
success  ever  is,  where  games  of  pure  chance  are  concerned)  has 
been  the  result  of  skilful  conduct  on  his  own  part;  and  there  never 
has  been  a  ruined  gambler  (though  ruined  gamblers  are  to  be 
counted  by  thousands)  who  has  not  believed  that  when  ruin  over- 
took him  he  was  on  the  very  point  of  mastering  the  secret  of  suc- 
197 


ECONOMIC   CRISES 

We  have  thus  far  discussed  individual  psychol- 
ogy. Let  us  turn  to  the  examination  of  certain 
social  forces  operating  to  bring  about  crises. 

We  have  been  giving  prominence  to  the  effect 
of  belief  upon  action.  It  is  not  intended  to  ignore 
the  equally  important  effect  of  action  upon  feelings 
and  beliefs.  But  as  actions  are  more  ruled  by 
social  considerations  than  are  beliefs,  the  discussion 
of  the  effect  of  action  has  been  postponed  to  this 
point. 

The  persistent  exertion  of  will  power  to  force 
one  to  a  certain  line  of  action  possesses  a  remark- 
able power  to  coerce  the  feelings  into  harmony 
with  the  action  performed.  In  the  competitive 
system,  the  business  man  is  soon  taught  that  to 
court  success  properly  he  must  put  on  all  the 
appearance  of  success,  and  talk,  act,  and  look  as  if 
he  were  successful.  A  merchant  attracts  trade  by 
professing  that  he  already  has  it  and  by  acting  as 
if  he  were  in  the  height  of  a  deserved  prosperity. 
Merchants  drive  trade  with  merchants  by  talking 

cess.  It  is  this  fatal  confidence  which  gives  gambling  its  power 
of  fascinating  the  lucky  as  well  as  the  unlucky.  The  winner  con- 
tinues to  tempt  fortune,  believing  all  the  while  that  he  is  exerting 
some  special  aptitude  for  games  of  chance,  until  the  inevitable 
change  of  luck  arrives;  and  thereafter  he  continues  to  play  because 
he  beheves  that  his  luck  has  only  deserted  him  for  a  time,  and 
must  presently  return.  The  unlucky  gambler,  on  the  contrary, 
regards  his  losses  as  sacrifices  to  insure  the  ultimate  success  of  his 
'  system,'  and  even  when  he  has  lost  his  all,  continues  firm  in  the 
belief  that  had  he  had  more  money  to  sacrifice,  he  could  have 
bound  fortune  to  his  side  forever."  —  "  Littell's  Living  Age,"  "  Gam- 
bling Superstitions,"  Vol.  CXIV,  p.  io6. 
198 


THE  PSYCHOLOGY  OF  CRISES 

general  trade  prosperity  to  one  another.  Adver- 
tisements must  always  assume  a  confident,  cheer- 
ful tone  and  give  the  impression  of  assured  success. 
Physicians,  to  court  the  best  clientage,  must  live 
well,  dress  well,  drive  stylish  equipages,  and  assume 
all  the  appearances  of  success.  All  these  actions 
do  very  truly  tend  to  coerce  feelings  and  opinions 
into  lines  harmonious  with  themselves  and  enforce 
the  appropriate  feelings  of  optimism  which,  as  we 
have  seen,  are  only  too  ready  to  spring  up  and 
dominate  the  thought.  At  this  point  a  suggestion 
of  Walter  Bagehot  may  be  recalled.  He  con- 
tended that  this  generation  was  afflicted  by  too 
great  a  desire  for  activity,  and  that  this  surplus 
activity  accounted  for  some  of  the  serious  defects 
of  our  economic  practice.  Optimism  is  the  appro- 
priate mental  state  to  accompany  activity.  This 
activity  and  optimism  produce  the  gullible  public 
and  the  promoter  who  sees  fields  for  enterprise 
where  no  enterprise  should  be  undertaken.^^ 

Next  to  the  optimistic  activity  which  the  com- 
petitive trade  system  enforces  upon  its  members, 
the  economic  consequences  of  belief  in  testimony 
should  be  considered.  If  the  individual  mind 
works  imperfectly  and  is  prone  to  certain  chronic 
errors,  the  social  mind  is  yet  more  unsatisfactory 
in  many  ways.  In  the  social  mind,  the  tendency 
toward  optimistic,  extreme,  and  intense  views 
appears  more  marked.     We  receive  only  a  small 

21  Bagehot,  "  Physics  and  Politics,"  "  Complete  Works,"  Vol.  IV, 
p.  567- 

199 


ECONOMIC  CRISES 

portion  of  our  beliefs  as  a  result  of  our  own 
observation  and  independent  thought.  Most  of 
our  guidance  comes  from  the  testimony  of  others. 
This  ready-formed  opinion  our  intellectual  inertia 
leads  us  to  accept.  The  coercive  power  of  a  gen- 
erally accepted  view  is  very  great,  and  only  the 
most  independent  minds  can  hold  out  against  it.^^ 
Under  the  influence  of  the  struggle  for  eminence, 
success  comes  to  the  front  for  display,  while  failure 
tries  to  hide  itself.  In  so  far  as  economic  forces 
are  controlled  by  the  struggles  of  individuals  for 
success,  it  is  optimistic  testimony  which  is  most 
available  in  economic   matters.      The  businesses 

22  Alexander  W.  Kinglake,  in  his  book  "  Eothen,"  brings  out  the 
power  which  the  generally  accepted  opinion  has  over  the  stoutest 
doubter.  He  refers  to  the  effect  upon  Europeans  of  the  Eastern 
belief  in  magic.  "There  is  no  controversy  about  the  matter.  The 
effect  of  this,  the  unanimous  belief  of  an  ignorant  people  upon  the 
mind  of  a  stranger,  is  extremely  curious  and  well  worth  noticing. 
A  man  coming  freshly  from  Europe  is  at  first  proof  against  the 
nonsense  with  which  he  is  assailed;  but  often  it  happens  that  after 
a  little  while  the  social  atmosphere  of  Asia  will  begin  to  infect  him, 
and,  if  he  has  been  unaccustomed  to  the  cunning  of  fence  by 
which  reason  prepares  the  means  of  guarding  herself  against  fal- 
lacy, he  will  yield  himself  at  last  to  the  faith  of  those  around  him; 
and  this  he  will  do  by  sympathy,  it  would  seem,  rather  than  from 
conviction.  I  have  been  much  interested  in  observing  that  the 
mere  '  practical  man,'  however  skilful  and  shrewd  in  his  own  way, 
has  not  the  kind  of  power  that  will  enable  him  to  resist  the  gradual 
impression  made  upon  his  mind  by  the  common  opinion  of  those 
whom  he  sees  and  hears  from  day  to  day."  —  Ch.  VIII. 

Bagehot,  in  "  Physics  and  Politics,"  referring  to  the  above,  says, 
"  In  true  metaphysics  I  believe  that  (contrary  to  common  opinion) 
unbelief  far  oftener  needs  a  reason  and  requires  an  effort  than 
belief." — "Complete  Works,"  Vol.  IV,  pp.  494,  495. 
200 


THE   PSYCHOLOGY  OF  CRISES 

which  are  to  be  seen  are  those  which  have  survived 
the  shocks  of  trade.  Those  which  have  failed 
have  disappeared.  Success  is  contagious.  A  prom- 
inent American  paper  recently  published  this  state- 
ment :  "  It  will  be  noticed  that  the  list  of  Wall 
street  losers  is  never  published."  Another  trade 
paper  contains  the  following :  "  Mark  Twain,  in 
one  of  his  books,  says .  he  never  saw  in  all  the 
splendid  battle  scenes  in  the  Louvre  a  picture  of  a 
single  French  defeat,  and  the  remarks  contain  a 
large  amount  of  sound  philosophy.  Hence  it  is 
not  the  rule,  or  the  exception  either,  for  the  news- 
papers to  chronicle  advertising  failures,  of  which 
there  are  undoubtedly  many."  Not  only  is  the 
true  success  in  evidence,  but  a  false  showing  is 
made  by  the  counterfeit  of  success  which  the 
struggle  for  social  position  leads  many  to  attempt, 
when  reason  would  counsel  a  more  humble  course. 
This  false  social  attitude  toward  economic  affairs 
may  be  expected  to  continue  so  long  as  the  eco- 
nomic life  is  overemphasized.  So  long  as  business 
success  is  taken  as  the  sovereign  criterion  for  judg- 
ing of  a  man's  character  and  ability,  every  motive 
which  can  lead  a  man  to  desire  good  standing  in 
the  eyes  of  his  fellow-men  will  lead  him  to  struggle 
for  economic  success  and  counterfeit  it  when  not 
really  achieved.  A  subordination  of  the  economic 
test  to  other  tests  would  decrease  the  intensity  of  this 
struggle  and  diminish  the  fundamental  influences 
which  now  make  for  crises.  It  only  remains  to  be 
noticed  that  the  influences  here  discussed  derive 

20I 


ECONOMIC   CRISES 

their  force  and  significance  from  their  social  char- 
acter. The  closer  a  business  man  is  in  touch  with 
his  competitors,  the  more  will  competition  and  emu- 
lation stimulate  him.  Competitive  business  in  trade 
centres  becomes  more  or  less  like  industrial  war- 
fare or  a  series  of  personal  combats.  The  leaders 
naturally  recognized  are  those  who  excel  in  the 
achievement  of  that  toward  which  all  are  working, 
and  their  influence,  as  leaders,  is  to  mould  others 
to  a  type  with  themselves.  In  the  heat  of  this 
struggle  unwise  ventures  are  made,  unwise  expen- 
ditures are  encouraged,  and  the  moral  code  is 
stretched  to  the  breaking  point  The  business 
world  deceives  itself  and  thwarts  itself. 

To  return  to  the  passage  of  opinions  from  one 
to  another  in  a  social  group,  it  may  be  observed 
that  growth  of  erroneous  beliefs  can  be  carried 
much  further  by  a  crowd  of  persons  associated 
than  by  the  persons  composing  it  when  separated. 
This  is  brought  about  by  the  reaction  of  opinion 
upon  opinion.  As  McCulloch  said :  "  In  specula- 
tion, as  in  most  other  things,  one  individual  derives 
confidence  from  another.  Such  a  one  purchases 
or  sells,  not  because  he  has  any  particular  or  accu- 
rate information  in  regard  to  the  state  of  the 
demand  and  supply,  but  because  some  one  else 
has  done  so  before  him."  ^  If  it  be  granted  for 
purpose  of  argument  that  each  individual  may  be 
capable  of  only  a  limited  error  in  estimating  the 

*'  Bowen,  "  Principles  of  Political  Economy,"  p.  437. 
202 


THE   PSYCHOLOGY  OF  CRISES 

future  condition  of  industry  upon  the  basis  of 
present  indications,  it  will  be  seen  that  his  opin- 
ion, as  expressed  or  implied  by  his  acts  upon  the 
market,  may  serve  as  evidence  from  testimony  for 
others.  They,  in  turn,  when  considering  the  same 
problem,  will  allow  a  certain  weight  to  this  testi- 
mony. If  we  suppose  a  like  inclination  on  their 
part  to  see  business  success  as  certain  where  it  is 
desired,  they  may  advance  by  means  of  their  indi- 
vidual increment  of  error  one  step  further  than  the 
previous  trader  toward  a  speculative  and  unsound 
estimate.  The  market  dealings  resulting  from  this 
second  or  derivative  judgment  may  in  turn  serve 
as  the  basis  of  a  still  more  erroneous  estimate  made 
similarly  by  others.  Thus  one  may  serve  to  bol- 
ster another  up.  The  opinion  of  the  associated 
trading  public  is  reflected  back  and  forth,  while 
with  each  successive  transfer  of  influence  an 
increment  of  error  is  added  which  lifts  the  entire 
group,  step  by  step,  through  the  mutual  accumula- 
tions of  error  in  the  direction  of  overconfidence 
and  recklessness  to  a  point  of  absurdity  further 
than  any  one  of  those  involved  would,  with  the 
ordinary  use  of  his  reason,  have  advanced  himself 
singly. 

Although  these  accumulations  of  error  are  most 
important,  the  influence  of  belief  in  testimony  can 
hardly  be  made  to  account  for  all  the  vagaries  of 
belief  which  accompany  a  crisis.  States  of  mind, 
hopes  and  beliefs,  are  communicated  from  one  to 
another  by  means  of  what  is  best  described  as 
203 


ECONOMIC   CRISES 

sympathy.  The  intense  feeling  which  can  be 
produced  in  religious,  political,  or  other  assem- 
blages, is  something  more  than  can  be  accounted 
for  by  the  mere  argument  presented  to  the  mind. 
The  more  intimate  the  association,  the  more  will 
the  common  thinking  processes  be  influenced  by 
the  sympathetic  force.  The  most  extreme  phase  of 
the  operation  of  this  force  is  seen  in  the  unthinking 
ferocity  of  mob  action.^*  Inasmuch  as  the  pre- 
vailing economic  system  enforces  intimate  associa- 
tion in  a  sense  in  which  no  previous  system  ever 
did,  this  class  of  influences  tending  to  vitiate  the 
economic  reasoning  of  those  who  are  subject  to 
market  influences  may  well  demand  serious  atten- 
tion. Businesses  are  being  increasingly  concen- 
trated in  large  cities,  and  especially  are  those  who 
control  them  being  closely  compacted  together  in 
the  business  sections  of  great  cities.  It  has  been 
asserted  that  these  conditions  originate  the  influ- 
ences which  breed  crises,  and  the  case  of  Australia, 
where  the  population  is  unusually  concentrated  in 
cities,  has  been  cited  as  evidence.^  "  A  large  city 
is  characterized  by  an  intensity  of  internal  imita- 
tion  in  proportion   to  the    density  of  population, 

2*  Boris  Sidis,  in  an  article  entitled,  "  A  Study  of  the  Mob,"  in 
the  "Atlantic  Monthly"  (Vol.  LXXV,  February,  1895,  pp.  188-197), 
points  out  the  very  significant  relation  between  mobs  and  igno- 
rance, monotony  of  life,  and  social  oppression.  Cf.  Cesare  Lom- 
broso,  "A  Study  of  Mobs,"  " Chautauquan,"  June,  1892;  Bureau 
of  Education  "Circular  of  Information,  No.  4,"  1893,  "Abnormal 
Man,"  p.  109. 

25  Mr.  H.J.  Fletcher,  in  the  "Forum,"  August,  1895. 
204 


THE   PSYCHOLOGY  OF   CRISES 

and  the  multiform  multiplicity  of  the  relations  of 
its  inhabitants.  Thus  there  is  an  epidemic  and 
contagious  character  given  not  only  to  its  diseases, 
but  to  its  styles  and  views."  "^  The  so-called 
"booms"  of  American  towns  illustrate  in  acute 
form  the  occasional  economic  effect  of  these  influ- 
ences. The  power  of  mental  contagion  is  increased 
by  such  facilities  for  assemblage  and  communica- 
tion as  the  railway,  telegraph,  and  telephone.  It 
is  obviously  enhanced  by  the  practice  of  transact- 
ing business  in  industrial  assemblages  such  as 
stock  and  produce  exchanges.  Attention  may  be 
called  to  the  fact  that  in  periods  of  unusual  busi- 
ness success  or  depression,  this  physical  concen- 
tration of  traders  in  large  markets  is  greatly 
increased. 

The  force  of  sympathy  and  imagination  in  the 
propagation  of  opinions  is  not  an  intelligent  one 
and  in  economic  matters  it  makes  for  the  support 
of  opinions  dangerous  to  the  stability  of  industry.^'^ 

26  G.  Tarde's  book,  "  Les  Lois  de  I'lmitation,"  is  thus  summar- 
ized in  "Circular  No.  4,"  1893,  of  the  Bureau  of  Education,  p.  166. 

2'?  "  That  the  pubhc  opinion  of  the  masses  is  not  in  the  rule  the 
result  of  a  careful  proving  and  sifting  of  facts  has  been  already 
emphasized.  The  views  which  little  by  little,  as  occasion  offers, 
establish  themselves  as  the  reigning  opinion  are  produced  rather 
by  the  working  together  of  a  group  of  factors,  partly  active  and 
partly  passive.  Among  the  latter  the  most  important  is  the  instinct 
for  imitation  which  plays  an  impoitant  role,  not  only  in  regulating 
the  externals  of  society,  the  forms  of  social  intercourse,  clothing, 
etc.,  but  opinions  and  beliefs  as  well.  The  majority  of  men  be- 
longing to  the  middle  and  lower  ranks  of  society  readily  absorb 
those  opinions  regarding  public  matters  which  they  hear  most 
205 


ECONOMIC   CRISES 

An  undue  concentration  of  interest  resulting  in 
intense  emotion  is  always  prejudicial  to  sound  rea- 
soning. The  general  tendency  of  emotion  is  to 
paralyze  thought,  and  particularly  to  withhold  the 
mind  from  those  considerations  which  are  out  of 
harmony  with  itself.^^  The  social  effects  of  the 
undue  haste  to  be  rich  are  quite  as  serious  for  the 
social  structure  of  industry  as  we  have  already 
seen  the  exclusive  attachment  of  interest  to  a  sin- 
gle aim  is  to  the  individual  intellect.  It  is  a  strong 
arraignment  of  the  ruhng  passion  which  is  given 
us  by  the  German  writer  Neuwirth  in  the  follow- 
ing conclusions  based  upon  the  study  of  the  cri- 
sis of  1873  :  "The  extravagant  love  of  gambling 
and  the  restless,  passionate  chase  after  wealth  form 
the  root  of  all  crises.  These  things  produce 
their  effects  more  frequently  and  destructively  as 

frequently  and  emphatically  expressed  by  others."  See  Franz 
Holtzendorff,  "  Oeffentliche  Meinung,"  p.  93. 

Most  young  men  espouse  the  political  parties  of  their  fathers. 
The  "  church  of  one's  choice  "  is  usually  the  one  attended  by  one's 
parents. 

The  sympathetic  influence  we  are  considering  is  doubtless  allied 
to  hypnotic  influence.  Cf.  Edward  Fry,  "  Imitation  in  Human 
Progress,"  "  Contemporary  Review,"  Vol.  LV,  1889,  p.  662;  Albert 
Moll,  "  Hypnotism,"  pp.  221,  222. 

28  Alexander  Bain  enunciated  the  law :  "  When  we  are  under  a 
strong  emotion,  all  things  discordant  with  it  keep  out  of 'sight.  A 
strong  volitional  urgency  will  subdue  an  opposing  consideration 
actually  before  the  mind;  but  intense  feeling  so  lords  it  over  the 
intellectual  trains  that  the  opposing  considerations  are  not  even 
allowed  to  be  present."  —  "The  Emotions  and  the  Will,"  p.  523. 
See  Chalmers'  celebrated  sermon  "  On  the  Expulsive  Power  of  a 
New  Affection";  James  Sully,  "Illusions,"  pp.  308-316. 
206 


THE   PSYCHOLOGY  OF  CRISES 

our  age  thinks,  trades,  and  lives  more  quickly. 
Science  may  ever  so  skilfully  indicate  the  ultimate 
causes  of  industrial  storms  and  their  periodic 
recurrence,  it  may  ever  so  clearly  point  out  the 
immediate  seat  of  the  difficulty  and  the  remedies 
to  be  applied,  but  the  particular  primary  cause  lies 
always  in  that  fatal  peculiarity  of  the  gold-hunting, 
gold-worshipping  human  family  against  which 
common  sense  and  science  are  equally  puny  and 
powerless."  2^  If  the  passion  of  the  haste  to  be 
rich  operates,  as  has  been  here  set  forth,  to  upset 
the  individual  judgment,  destroy  experience,  sup- 
press proper  consideration  of  risk  and  dishonesty, 
and  force  economic  activity  along  unwise  lines,  it 
goes  very  far  to  account  for  the  occurrence  of  eco- 
nomic crises.  The  crisis  simply  ruptures  untena- 
ble conditions  and  reduces  valuations  to  their 
proper  level.^*^  Hence,  in  a  certain  sense,  the  crisis 
may  be  said  to  be  not  only  inevitable  but  servicea- 
ble, inasmuch  as  it  performs  a  necessary  work  in 
readjusting  economic  forecasts  to  reality. ^^ 

In  the  crisis  may  be  found  a  new  set  of  psychi- 
cal phenomena  which  it  is  of  interest  to  indicate 
briefly  before  passing  to  the  question  of  remedies. 
In  contrast  to  the  activity  and  optimism  of  the  pre- 

29  Neuwirth, "  Speculationskrisis  von  1873,"  Kap.  V,  pp.  312,  313. 

^  This  is  tersely  expressed  by  Horace  White :  "  The  want  of 
confidence  which  upsets  commercial  calculations  and  brings  on  a 
crisis  is  the  disturbance  or  rupture  of  a  commonly  received  opinion 
that  fifty  cents'  worth  of  goods  are  equal  to  a  dollar  in  gold."  — 
Lalor,  Article  "  Commercial  Crises,"  Vol.  I,  p.  529. 

^1  See  note  No.  16. 

207 


ECONOMIC   CRISES 

crisis  period  there  may  be  found  in,  and  subsequent 
to  the  crisis  a  very  deep  feeHng  of  depression  and 
a  very  general  lassitude.  The  change  from  one 
condition  to  another  may  be  made  with  great  rapid- 
ity because  the  mechanism  of  trade,  and  especially 
of  currency,  suddenly  turns  the  full  force  of  the 
competitive  impulse  in  a  reverse  direction,  and  in- 
tensifies it,  inasmuch  as  the  struggle  to  save  prop- 
erty in  danger  of  loss  may  be  more  severe  than  the 
primary  struggle  to  secure  it.  "  The  indiscretion 
of  the  period  of  business  expansion,  the  luxurious 
and  extravagant  life  based  upon  fictitious  profits, 
and  the  wild  chase  of  speculation  are  transformed 
in  the  crises  into  an  oppressive  anxiety,  a  sharp 
reduction  of  expenditures,  even  in  cases  where  not 
necessary,  and  a  critical,  suspicious  attitude  toward 
the  advancing  of  capital,  even  against  the  best  of 
security.  The  entire  nation  suffers  the  aches  and 
pains  of  sobering  up  after  its  intoxication  and  the 
subjective  forces  fail  to  facilitate  the  process  of 
recuperation."  ^ 

Psychologists  tell  us  that  a  state  of  emotion  is 
only  gra.dually  created  or  subdued.  It  is  reason- 
able to  think  that  a  state  of  social  excitement  is 
more  gradual  in  its  origin  and  subsidence  than  are 
states  of  individual  emotion.  The  excitement 
which  accompanies  the  rapid  growth  of  trade  is 
in  the  crisis  transformed  in  character  and  intensi- 
fied to  the  highest   pitch.     While   an    emotion  is 

*2  Oechelhauser,  "  Die  Wirthschaftliche  Krisis,"  pp.  84,  85. 
208 


THE   PSYCHOLOGY   OF   CRISES 

only  gradually  subdued,  it  may  be  easily  trans- 
ferred from  one  feeling  to  another.  "  The  feeling 
of  an  enraged  people  cannot  at  once,  in  the 
absence  of  a  victim,  be  soothed  or  appeased  ;  it 
may  be  diverted  into  a  safe  or  harmless  channel ; 
or  some  altogether  new  emotion  may  be  called 
into  being,  by  means  of  an  adequate  occasion,  as, 
for  example,  something  to  awaken  the  sentiment 
of  pride."  ^  The  transfer  of  emotion  from  one 
feeling  to  another  is  particularly  easy  when  the 
second  is  entirely  opposite  to  the  first  in  character. 
The  passage  from  smiles  to  tears  is  proverbially 
easy.  Such  a  jump  from  the  top  of  the  scale 
of  feelings  to  the  bottom  as  is  witnessed  during 
the  crisis  corresponds  to  the  general  law  of 
change  in  feeling  and  is  a  manifestation  of  the 
social  law  called  by  Schaffle  the  "  law  of  con- 
trast."** 

Other  transfers  of  feeling  besides  that  to  a 
diametrically  opposed  feeling  are  possible.  It  is 
interesting  to  note  that  the  emotions  which  have 
been  generated  by  speculative  excitement  and 
intensified  by  panic  depressions  have  been  fre- 
quently transferred  to  religious  subjects  and  have, 
in  the  United  States  at  certain  times,  given  rise 

^  Alexander  Bain,  "The  Emotions  and  the  Will,"  p.  43. 

'*  "  If  we  soar  above  the  normal  business  level  at  one  time,  we 
shall  certainly  fall  below  it  at  another;  and  the  higher  the  flight, 
the  more  rapid  and  great  will  be  the  descent.  The  greatest  panics 
are  always  preceded  by  the  most  intense  activity  and  speculation." 
—  Henry  Wood,  "Natural  Law  in  the  Business  World,"  pp.  175, 
176. 

209 


ECONOMIC   CRISES 

to  remarkable  revivals  of  religion  following  close 
upon  the  heels  of  panics.^^ 

86  Evidence  of  the  recognition  of  this  connection  is  abundant  in 
contemporary  religious  literature.  (See  E.  P.  Whipple,  "  Outlooks 
on  Society,  Literature,  and  Politics,"  pp.  12  and  others.)  It  is 
only  reasonable  that  the  destruction  of  temporal  prospects  should 
turn  the  mind  to  ambitions  of  another  character. 

The  history  of  the  extraordinary  revival  movement  of  1857  con- 
nects it  immediately  with  the  crisis  of  that  year.  A  few  extracts 
from  a  contemporary  account  will  serve  to  explain  this.  "  It  was 
in  October  of  this  year  (1857)  that  Mr.  Lamphier,  a  missionary  of 
the  Dutch  Reformed  Church,  thought,  in  his  own  heart,  that  an 
hour  of  daily  prayer  would  bring  consolation  to  afflicted  business 
men."  In  a  few  weeks  those  holding  the  meetings  were  astonished 
to  find  the  crowds  growing  too  large  for  the  buildings.  The  Metho- 
dist Church  on  John  Street  and  the  Dutch  Reformed  Church  on 
Fulton  Street  were  opened  daily.  Next,  Burton's  theatre  was  hired, 
and  throughout  the  winter  noonday  prayer-meetings  were  held  at 
numerous  places  in  the  city.  Even  the  firemen  and  policemen  held 
their  prayer-meetings,  so  that  we  may  feel  perfectly  assured  of  the 
truth  of  what  the  writer  says  when  he  adds,  "  It  is  doubtful  whether 
under  heaven  was  seen  such  a  sight  as  went  on  in  the  city  of  New 
York  in  the  winter  and  spring  of  the  year  1857-58."  "From 
New  York  as  a  centre,  the  mysterious  influence  spread  abroad  till  it 
penetrated  all  New  England  in  the  East,  southward  as  far  as  Vir- 
ginia, and  even  beyond,  westward  to  Buffalo,  Cincinnati,  Chicago, 
St.  Louis."  —  "The  Galaxy,"  "Great  Awakenings,"  Vol.  VI,  pp. 
388,  389.  A  very  significant  peculiarity  of  this  movement,  and  one 
which  caused  much  mystification,  was  its  spontaneity  {op.  cit., 
p.  390).  If  we  recall  the  ease  with  which  emotions  may  be  trans- 
ferred this  difficulty  solves  itself. 

Dr.  Storrs,  the  president  of  the  American  Board,  said,  in  an 
address  delivered  at  Madison,  Wis.,  before  the  Board,  on  October 
12,  1894,  "You  say  how  is  it  in  our  time  as  contrasted  with  1857? 
God  for  two  years  has  been  grinding  our  communities  under  the 
pressure  of  commercial  disease  and  distress,  and  He  has  been  un- 
able —  reverently  be  it  said  —  to  grind  them  down  into  a  position 
of  carelessness  of  the  world  and  of  penitent  prayerfulness,  or  rich 
210 


THE   PSYCHOLOGY   OF   CRISES 

We  may  conclude  that  the  depression  of  the 
period  subsequent  to  a  crisis  is  due,  first  of  all,  to 
the  excitement  created  by  business  prospects  prior 
to  the  crisis,  and  that  this  excitement  is  not  im- 
mediately extinguished  in  the  crisis,  but  is  altered 
in  form.  Its  strength  is  increased  by  the  refresh- 
ment of  feeling  which  comes  from  a  change  in  the 
nature  of  the  interest  presented  to  the  mind.  As 
James  Sully  says,  "  Pain  and  pleasure  alike  are 
heightened  or  intensified,  or  have  their  disagree- 
able or  agreeable  side  emphasized,  by  a  transition 
from  and  contrast  to  the  opposite  phase  of  feel- 
ing." ^  Finally,  this  depression  is  chiefly  due  to 
the  feeling  naturally  generated  by  the  realization 
of  loss.  In  the  measure  that  one's  interests  have 
been  concentrated  upon  business  will  the  destruc- 
tion of  business  prospects  leave  the  mind  confused, 
bereft  of  any  serious  or  sufficient  purpose,  liter- 
ally "aimless,"  and  hence  despondent.  As  the 
depression  of  the  post-crisis  period  wears  away 
and  a  normal  condition  of  business  is  established, 

revivals  would  have  followed  as  they  did  in  '57."  —  "Wisconsin 
State  Journal,"  October  13,  1894.  The  explanation  of  this  is  that 
before  the  appearance  of  the  crisis  of  1893  the  sails  of  business 
were  closely  trimmed,  and  no  such  intense  excitement  accompanied 
the  crisis  as  was  experienced  in  1857,  when  the  crash  came  as  the 
result  of  the  reckless  speculation  of  the  fifties.  Cf  Albert  C. 
Stevens,  "Phenomenal  Aspects  of  the  Financial  Crisis,"  "Forum," 
Vol.  XVI,  September,  1893. 

What  feeling  there  was  generated  in  1893  and  during  the  sub- 
sequent hard  times  found  vent  in  the  McKinley-Bryan  presidential 
campaign. 

86  James  Sully,  "  The  Human  Mind,"  Vol.  II,  p.  29. 
211 


ECONOMIC   CRISES 

the  end  of  the  crisis  cycle  is  reached  and  the  way 
is  cleared  for  the  first  stirrings  of  enterprise  and 
the  first  promptings  of  hope  which  herald  the 
beginning  of  a  new  cycle. 

The  discussion  of  remedies  for  the  conditions 
which  have  been  occupying  our  attention  is  pecul- 
iarly difficult,  since  the  subjective  forces  in  ques- 
tion are  difficult  to  change  or  to  bring  under 
permanent  subjection.  The  first  thing  which  sug- 
gests itself  is  education.  A  certain  kind  of  educa- 
tion has  been  making  rapid  strides  of  recent  years, 
but  it  is  open  to  question  whether  we  are  not  still 
greatly  in  need  of  an  education  adapted  to  give 
clear  ideas  concerning  the  duties  and  responsibil- 
ities incident  to  Hving  in  a  social  state  like  that 
prevaihng  at  present. 

For  the  education  of  business  men  a  technical 
training  is  not  sufficient.  The  president  of  a  suc- 
cessful college  of  mines  says  that  disastrous  mis- 
takes probably  occur  in  the  practice  of  a  mining 
engineer  oftener  through  ignorance  of  the  petro- 
graphical  and  geological  relations  of  the  ore  de- 
posits in  question  than  from  lack  of  engineering 
or  metallurgical  skill.  In  the  same  spirit,  we  may 
say  that  the  graver  afflictions  of  industry  come 
oftener  from  ignorance  of  economic  science  than 
from  incapacity  to  solve  the  technical  problems 
of  industry.  The  technical  education  attempts  to 
show  one  how  to  pass  his  competitors,  but  it  does 
not  open  an  intellectual  horizon  wide  enough  to 


THE   PSYCHOLOGY   OF   CRISES 

enable  one  to  see  how  in  the  struggle  of  individuals 
all  may  be  defeated  because  of  the  imperfection 
of  the  general  industrial  system.  There  is,  among 
business  men,  often  a  lack  of  a  comprehensive 
mental  life,  of  a  broad,  sane  vision  of  the  whole 
of  society,  or  even  of  the  whole  of  industry.  It  is 
important  that  business  men  should  be  acquainted 
with  the  larger  aspects  of  business  as  set  forth  in 
political  economy.^''  The  trouble  often  is,  as  Mr. 
Whipple  observed  concerning  the  crisis  of  1857, 
that  merchants  become  political  economists,  not 
when  their  obligations  are  incurred,  but  when  they 
have  matured.^^  Judgment,  resting  as  it  does  upon 
experience,  cannot  be  accurate  until  the  mind  has 
long  been  storing  up  the  materials  for  it  in  unbiassed 
observation  and  thinking.^^  Education  is  to  be 
recommended  for  its  effect  in  stimulating  individ- 
ual self-confidence^^  and  independent  thinking,  and 

^"^  Cf.  Holtzendorff,  "  Oeffentliche  Meinung,"  pp.  132-144. 

88  "Outlooks  on  Society,  Literature,  and  Politics,"  "Essay  on 
Panics  and  Investments."  It  would  be  difficult  to  state  better  than 
Mr.  Whipple  has  done  in  this  essay  the  moral  aspects  of  crises. 
See  especially  pp.  23,  24. 

*3  "  It  has  been  a  frequent  remark  in  the  course  of  our  exposi- 
tion of  the  mind  that  for  prudential  forethought,  and  for  sympathy 
alike,  there  is  needed  an  effective  recollection  of  pleasures  and 
pains."  —  Bain,  o/>.  cit.,  p.  113. 

*''  "  A  merchant  must  not  only  have  confidence  in  those  around 
him,  but  also  in  himself.  Confidence  in  his  own  powers  of  judgment 
will  render  him  prudent  in  husbanding  his  resources,  calm  in  the 
midst  of  speculation  and  excitement,  and  firm  of  purpose  under 
difficulty.  In  this  important  particular  many  are  wanting:  they 
have  not  sufficient  confidence  in  themselves  to  think  or  act  inde- 
pendently; but  are  led  by  the  example  and  guided  by  the  opinion 
213 


ECONOMIC   CRISES 

hence  for  its  tendency  to  check  dangerous  vagaries 
of  popular  feeling."  To  effect  these  purposes,  the 
progress  of  culture  must  be  very  general.  A  con- 
servative, clear-seeing  individual  here  and  there 
will  not  suffice.  It  is  necessary  to  cultivate  such 
a  general  spirit  of  solidity  as  shall  express  itself 
effectively  through  public  opinion  and  general 
practice  and  be  capable  of  repressing  bad  indus- 
trial symptoms  before  they  have  gained  headway. 
A  quotation  from  Mr.  John  Mills,  whose  work  was 
mentioned  at  the  opening  of  this  chapter,  is  here 
in  place.  "  Educate  indeed  as  we  may,  credit  will 
always  fulfil  its  own  law  of  growth ;  and,  as  you 
cannot  endow  all  men  with  caution  and  conscience, 
the  growth  will  still  tend,  at  intervals,  to  degenerate 

of  their  neighbors;  and  while  so  doing  they  commit  actions  as 
rash  as  jumping  from  a  railway  carriage  or  rushing  from  a  crowded 
building  on  the  first  cry  of  danger.  Unaccustomed  to  exercise 
their  judgment,  they  give  way  to  the  first  alarm  without  examining 
its  cause;  an  unaccountable  tremor  seizes  them  and  renders  them 
deaf  to  reason;  a  natural  anxiety  gives  way  to  overwhelming  fear, 
and  they  insure  the  result  they  are  most  anxious  to  avoid  —  a  com- 
mercial panic  !  "  —  Callander,  "The  Commercial  Crises  of  1857," 
p.  10. 

"  Adam  Smith,  speaking  of  what  he  calls  "  inferior  ranks  of 
people,"  says,  "  The  more  they  are  instructed,  the  less  liable  they 
are  to  the  delusions  of  enthusiasm  and  superstition,  which,  among 
ignorant  nations,  frequently  occasion  the  most  dreadful  disorders." 
—  "  Wealth  of  Nations,"  Bk.  V,  Part  III,  Art.  II,  Sec.  60.  See  also 
Bk.  V,  Part  III,  Art.  Ill,  Sec.  14,  where  he  says,  "  Science  is  the 
great  antidote  to  the  poison  of  enthusiasm  and  superstition." 
Taine,  in  his  "  Ancient  Regime,"  writes  somewhat  pessimistically 
of  the  state  of  reason,  which  he  says  is  at  best  but  an  unstable 
equilibrium.  Bk.  Ill,  Ch.  IV  (translated  by  Duran,  1876),  pp. 
238,  239. 

214 


THE   PSYCHOLOGY   OF   CRISES 

into  a  critical  rankness ;  but  it  is  very  sure  that,  to 
the  extent  in  which  you  increase  the  average  intel- 
ligence and  elevate  the  average  moral  tone,  you 
cooperate  with  the  conservative  action  of  economic 
law  on  the  equilibrium  of  Credit  and  Capital.  It 
is  the  liability  to  an  ignorant  speculative  excite- 
ment, and  a  willingness  to  take  hmnoral  risks, 
which  ultimately  put  the  growth  of  Credit  beyond 
the  control  of  the  price  of  loan  capital.  Diminish 
those,  and  the  cycle  may  then  expand  beyond  its 
customary  decade."  ^  If  crises  rest  ultimately,  as 
many  think,  upon  a  self-interest  so  unduly  devel- 
oped as  to  shut  out  a  proper  regard  for  the  social 
side  of  economic  life,  and  if  this  is  contributed  to 
by  a  weakness  which  permits  the  abuse  of  the 
trust  imposed  by  credit,  then  true  reform  must 
come  through  the  slow  processes  of  character 
building. 

Since  it  has  been  shown  that  an  undue  concen- 
tration of  interest  upon  economic  matters  begets 
distorted  individual  judgments  and  feverish  and 
fatuous  social  struggles  for  wealth,  it  is  desirable, 
by  means  of  education  or  otherwise,  to  widen  the 
range  of  social  interests.  If  the  proof  that  an 
age  given  over  to  the  production  of  wealth  loses 
many  of  the  higher  pleasures  of  social  and  indi- 
vidual life,  and,  even  in  economic  affairs,  deceives 
itself  because  of  the  wasteful  and  unsatisfactory 
character  of  wealth  consumption,  when  the  arts 
of  consumption  are  neglected,  does  not  constitute 

*2  "  Credit  Cycles,"  p.  39. 
215 


ECONOMIC   CRISES 

a  convincing  argument,  then  it  may  be  proven  that 
such  an  age  falls  short  of  being  even  a  perfect 
producer  of  wealth.  To  avoid  the  ill  effects  of  an 
undue  concentration  of  mind,  we  must  broaden 
our  interests.  To  tone  down  the  feverish  char- 
acter of  industry,  we  must  have  more  than  a  single 
aim  and  more  than  a  single  goal  to  work  for. 

It  has  been  asserted  that  economic  interests  are 
peculiarly  dominant  in  the  United  States,  and  this 
is  undoubtedly  true ;  but  there  are  many  reasons 
why  this  may  be  considered  a  passing  phase  of 
our  national  evolution.  The  tempting  opportu- 
nities of  a  new  country  stimulate  to  effort.  In  the 
founding  of  a  settlement,  material  interests  must 
of  necessity  be  first  considered.  A  relatively 
unorganized  society,  in  which  wealth  lies  at  hand 
as  the  most  convenient  criterion  of  social  worth, 
stimulates  the  socially  ambitious  to  secure  wealth  for 
an  ulterior  purpose.  Professor  Hugo  Munsterberg 
says  :  "  The  American  business  man  hunts  success 
very  energetically,  but  he  does  not  care  for  money 
itself.  He  wants  a  fortune  because,  in  a  country 
without  titles  and  orders,  wealth  is  the  only  meas- 
ure of  worth."  43     Ag  Q^j.  country  becomes  older, 

*3  This  is  a  discriminating  statement,  conveying  quite  a  different 
idea  from  the  assertion  of  De  Tocqueville,  who  said,  "  A  native 
of  the  United  States  clings  to  this  w^orld's  goods  as  if  he  were 
certain  never  to  die;  and  he  is  so  hasty  in  grasping  at  all  within 
his  reach  that  one  would  suppose  he  was  constantly  afraid  of  not 
living  long  enough  to  enjoy  them."  —  "Democracy  in  America" 
(Boston,  1873),  Vol.  II,  Bk.  II,  Ch.  XIII,  p.  163.  Cf.  E.  P.  Whip- 
ple, "  Outlooks  on  Society,  Literature,  and  Politics,"  p.  8. 
216 


THE  PSYCHOLOGY   OF   CRISES 

and  the  most  attractive  opportunities  are  taken, 
as  leisure  -for  something  besides  wealth  getting 
is  afforded,  and  as,  in  consequence  of  this,  another 
criterion  besides  wealth  is  used  in  determining 
social  standing,  we  may  look  for  a  radical  change 
in  the  characteristics  of  American  civilization. 
As  custom  grows  up  to  restrain  enterprise,  and 
the  class  which  guards  wealth  supplements  that 
earning  it,  the  practices  leading  to  crises  will  find 
less  and  less  place.  These  economic  changes  may 
be  confidently  expected  in  the  United  States,  but 
since  crises  have  not  been  limited  to  the  United 
States,  a  word  may  be  added  referring  to  older 
countries.  The  industrial  revolution  which  has 
so  transformed  the  nature  of  industry  during  the 
last  century,  has  permitted  the  older  nations  to 
enter  upon  a  nev/  and  unparalleled  course  of  wealth 
production,  which  has  for  a  time  made  them  resem- 
ble new  nations  so  far  as  the  prominence  of  eco- 
nomic interests  is  concerned.  As  we  look  for  the 
next  stage  of  industry  in  the  United  States  to 
exhibit  greater  conservatism  and  solidity,  for  the 
same  reasons  we  may  look  for  the  other  crises- 
suffering  countries  of  the  world  to  assume  again 
the  normal  characteristics  of  countries  old  in  the 
economic  sense. 

RESUME 

I.    The  psychology  of  crises,  —  review  of  some  theories. 

(a)   The   crisis   cycle  presents  a  succession  of  mental 
states. 

217 


ECONOMIC   CRISES 

(J?)    Recurring  crises  indicate  an  error  of  psychic  forces, 
(c)     A  powerful  impulse  will  distort  mental  states. 
(^)    Crises  result  from  undue  dominance  of  the  im- 
pulse to  secure  wealth. 
II.    Individual  effects  of  a  powerful  impulse. 

1.  Distorts  recollection. 

{a)    Modifies  force  of  the  original  impression. 

(b)  Mental  states  and  external  causes. 
(f)     Selection  of  details  in  recalling. 
(^)    Undesirable  recollections  repressed. 

2.  Distorts  anticipation. 

(rt)    Anticipation  free  from  correctives. 
(^)     Optimism  by  contrast. 

(c)  Imagination  ruled  by  desires. 

3.  Economic  practice. 

(a)  The  optimistic  become  leaders. 

(b)  Undue  concentration  of  interest  producing 

strong  emotion  promotes  errors  of  prac- 
tice. 

(r)     A  broadening  of  interest  demanded. 

{d)   Character  of  business  to-day. 

III.  Social  Psychology. 

1.  Effect  of  actions  upon  feeling. 

Competition  requires  the  simulation  of  success. 

2.  Belief  in  testimony. 

(«)    Effects  of  the  money  test  of  worth. 
(p)     Growth  of  increments  of  error  in  an  asso- 
ciated body  of  traders. 

3.  Sympathy  —  the  compactness  of  trading  commu- 

nities. 

IV.  The  reaction  of  the  panic. 

I.    The  intensity  of  feeling. 

Competition  to  save  property. 
V.   Remedies. 

Liberal  education. 

Widened  range  of  social  interests   lessening  the  im- 
portance of  economic  motives. 
218 


CHAPTER   X 

CONCLUSION 

The  more  important  of  the  theories  of  crises  take 
up  and  magnify  some  one  aspect  of  the  subject. 
They,  however,  each  develop  a  point  of  view 
which  it  is  necessary  to  accommodate  in  order  to 
gain  a  comprehensive  knowledge.  A  crisis  is  cer- 
tainly a  disturbance  of  the  equilibrium  between 
demand  and  supply.  A  helpful,  if  not  a  very  pen- 
etrating, view  of  the  causes  of  crises,  may  be  ob- 
tained by  arranging  them  according  as  they  arise 
from  the  side  of  demand  or  supply.  The  organi- 
zation of  industry  very  justly  demands  attention 
in  connection  with  crises,  so  that  the  proper  rela- 
tion of  the  size  and  structure  of  the  individual  busi- 
ness unit  to  the  social  industrial  organism  may  be 
understood.  The  dominant  change  in  modern  pro- 
duction is  due  to  the  increased  use  of  capital.  It 
is  necessary  to  learn  what  effect  this  has  upon  cri- 
ses. A  still  more  searching  study  of  economic  ten- 
dencies comes  in  the  consideration  of  the  effect  of 
the  growth  of  capital  power  upon  demand  through 
its  relation  to  the  welfare  of  the  wage-earning 
classes.  Since  contests  over  the  economic  theories 
involved  in  these  studies  bring  in  the  question  of 

219 


ECONOMIC   CRISES 

the  relation  of  the  state  to  the  economic  life,  the 
consideration  of  the  relation  of  legislation  to  crises 
is  a  pertinent  appendix  to  the  above.  A  quite  sepa- 
rate, but  equally  important,  phase  of  the  subject  is 
the  relation  of  the  mental  and  moral  tendencies  of 
business  men  to  crises.  This  study  includes  the 
examination  of  the  nature  of  credit  and  speculation, 
but  the  psychology  of  crises  is  a  much  larger  sub- 
ject than  this  and  demands  more  attention  than  it 
has  received. 

There  can  be  found  in  the  literature  devoted  to 
crises  a  sufficient  amount  of  data  to  present  fairly 
the  more  fundamental  characteristics  of  crises. 
The  chief  types  of  rational  interpretation  which 
these  data  will  permit  may  also  be  found  repre- 
sented. Under  these  conditions  it  is  not  a  particu- 
larly useful  proceeding  to  advance  a  competing 
theory  to  add  to  the  already  long  list.  It  is  much 
more  useful  to  attempt  to  knit  together  various 
contributions  into  an  orderly  whole,  making  what- 
ever additions  seem  necessary,  with  a  view  to  sup- 
plementing and  completing  what  has  already  been 
done. 

While  the  industrial  convulsion  which  character- 
izes the  crisis  is  obviously  a  lamentable  occurrence, 
there  are  certain  observations  regarding  the  loss 
due  to  a  crisis  which  it  is  desirable  to  set  down. 
Much  that  is  commonly  reported  as  loss  is  not  loss 
in  the  sense  of  destruction  of  utility.  The  railway 
system  of  the  United  States  has  remained  practi- 
cally the  same  during  the  few  years  preceding  the 
220 


CONCLUSION 

last  crisis  and  the  few  years  since.  In  that  period, 
however,  there  was  an  immense  variation  in  the 
selling  value  of  the  securities  which  controlled  prop- 
erty rights  in  that  railway  system.  A  decline  of 
market  values  is  not  to  be  understood  as  a  loss  of 
wealth  in  the  ordinary  sense,  when  the  finances 
of  an  entire  trading  community  are  concerned. 
During  a  crisis,  while  goods  decline  in  value,  money 
enhances ;  but  since  values  are  reckoned  in  terms 
of  money,  the  enhancement  of  the  value  of  money 
does  not  offset  the  decline  of  the  value  of  goods 
in  any  attempt  to  estimate  values  in  terms  of 
dollars  and  cents.  Strictly  speaking,  what  oc- 
curs is  a  transfer  of  values  from  certain  com- 
modities to  others.  This  transfer  favors  such 
persons  as  possess  wealth  in  money  or  in  obli- 
gations which  stipulate  the  payment  of  certain 
sums  of  money.^ 

The  direct  and  indirect  social  effects  of  crises 
are  numerous,  but  too  numerous  and  important  to 
be  taken  up  in  the  present  work.  There  are  also 
important  relations  between  crises  and  various 
economic  problems  which  are  appropriate  subjects 
for  the  attention  of  students  of  economic  problems. 
There  is  no  question  but  that  crises  promote  rather 

1  Hence  one  hears  the  expression  "  debts  have  grown  heavier." 
Senator  Chandler  of  New  Hampshire  said  in  the  Senate,  February 
1 6,  1897:  "Shrinkage  in  prices  has  been  most  serious  since  1890. 
The  value  of  property  in  the  United  States  was  $65,000,000,000  in 
1 890;  now  it  is  estimated  at  $49,000,000,000,  a  shrinkage  of  twenty- 
five  per  cent,  since  1890.  Our  debts  have  not  shrunk,  but  have 
remained  an  inexorable  charge." 


ECONOMIC   CRISES 

than  diminish  inequahties  in  the  distribution  of 
wealth,  for  in  the  extremity  of  the  man  of  ordinary 
means  lies  the  opportunity  of  men  of  very  large 
wealth.  Crises  intensify  the  real  meaning  of 
variations  in  wealth  by  reducing  large  numbers  of 
people  to  a  condition  of  want  which  gives  a  new 
meaning  to  the  difference  between  large  and 
small  wealth. 

Anything  which  increases  the  uncertainty  of 
business  tends  to  break  down  habits  of  thrift.  The 
distress  of  persons  who  in  ordinary  seasons  are 
self-supporting,  and  who  are  in  search  of  work,  is 
well  calculated  to  draw  out  the  benevolence  of 
the  charitable.  The  crisis  teaches  to  many  per- 
sons the  fatal  secret  that  they  can  live  without 
work. 

A  further  effect  of  uncertain  business  conditions 
is  the  growth  of  the  "  captain  of  industry  "  or  the 
one-man-power  system.  Slow-moving,  delibera- 
tive forms  of  business  management,  the  expansion 
of  which  is  much  to  be  desired  for  the  sake  of 
enlarging  the  number  of  persons  in  responsible 
positions,  are  at  a  disadvantage. 

The  coming  of  a  crisis  may  not  greatly  injure 
a  sound  economic  organism,  but  if  that  organism 
be  diseased,  a  crisis  will  intensify  its  evils.  A 
marked  increase  in  certain  kinds  of  crime  occurs 
during  a  crisis.^  The  decline  of  wages  renders 
necessary  woman   and   child    labor,  a  decline   of 

2  Ellis,  "The  Criminal,"  New  York,  1890,  p.  299;  Max  Haus- 
hofer,  "  Lehr  und  Handbuch  der  Statistik,"  2  Aufl.,  p.  47°- 

222 


CONCLUSION 

profits  increases  the  evasions  of  factory  acts. 
Unemployment  is  a  conspicuous  result  of  crises, 
and  the  whole  economy  of  production,  which  is 
built  up  in  periods  of  tranquillity  through  the 
division  of  labor,  is  marred  by  the  downward  dis- 
placement of  wage-earners  to  the  performance  of 
tasks  beneath  their  ability.  The  incompetent  are, 
of  course,  first  eliminated,  but  many  misfits  in  the 
relation  of  workman  to  task  result  from  the  fever- 
ish search  for  work  which  is  kept  up  during  a 
crisis.  Strikes,  lockouts,  and  industrial  disputes 
readily  grow  out  of  such  conditions,  while  all  types 
of  industrial  experiments,  such  as  cooperation  and 
profit-sharing,  aiming  to  inaugurate  reforms,  suffer 
distress.  Then  it  is  that  the  financial  machinery 
of  government  receives  criticism,  and  that  eco- 
nomic questions  are  dragged  out  for  ill-advised 
political  discussion  and  hasty  legislation. 

These  things  emphasize  the  reality  of  social 
solidarity.  And  this  suggests  that  there  is  a  soli- 
darity in  the  progress  of  scientific  thought,  as  well 
as  in  economic  conditions.  Progress  toward  a 
more  systematic  knowledge  of  crises  will  come 
chiefly  as  the  result  of  general  advances  in  eco- 
nomic science.  The  extinguishment  of  crises  will 
come  through  the  progress  of  general  economic 
evolution,  rather  than  as  the  result  of  the  applica- 
tion of  specific  remedies. 


223 


BIBLIOGRAPHY 


I.     GENERAL  WORKS 

Hadley,  A.  T.,  article    "Commercial   Crises"  in  "Johnson's 

Universal  Cyclopaedia"  (Ed.  of  1895). 

Vol.  II,  p.  423  ff.     Brief  historical  and  theoretical  discussion. 
Herkner,  H.,  article  "  Krisen  "  in  Conrad's  "  Handwdrterbuch 

der   Staatswissenschaften."     Bd.   IV,  p.    891    ff.     Jena, 

1892. 

Best  single  article  upon  the  subject  of  crises. 
Hyndman,  Henry  Mayers,  "Commercial  Crises  of  the  Nine- 
teenth Century."     London,  1892. 

Social  Science  Series,  Vol.  L. 
Juglar,    Clement,    "  Crises   Commerciales   et   de   leur    retour 

pdriodique   en   France,  Angleterre,  et   aux  Etats-Unis." 

2d  Ed.,  Paris,  1889. 

Special  use  is  made  of  the  accounts  of  the  Bank  of  France. 
"  Crises  Commerciales,"    in  Leon  Say's  "  Nouveau  Dic- 

tionnaire  d'Economie  Politique."     Tome  L  Paris,  1891. 
articles  "  Des   Crises    Commerciales   et   Monetaires   de 

1800  h.  1857,"  in  "Journal  des  Economistes,"  Tome  XIV, 

1856. 

Pages   14  ff.   and  p.   253   ff.      Presents   in   outline   the  points 

treated  more  at   length  in  Juglar's  book.      It  traces   for   France 

the   connection    between   crises    and  population,   price,   savings, 

speculation,  the  general  condition  of  the  market,  and  social  and 

political  relations. 
Laveleye,  Emile  Louis  Victor  de,  "  La  Marche  Mondtaire  et 

ses  crises  depuis  cinquante  ans."     Paris,  1865.     Also  see 

"Revue  des  Deux  Mondes,"  January  and  February,  1865. 
Macleod,   Henry   Dunning,    article   "Commercial   Crises,"    in 

Macleod's  "  Dictionary  of  Political  Economy."    London, 

1863. 

Q  225 


BIBLIOGRAPHY 

Marshall,  Alfred,  ''Economics  of  Industry."  ist  Ed.  London, 
1891.     Especially  Bk.  Ill,  Ch.  I. 

The  description  of  crises  there  contained  is  quoted  in  F.  A. 
Walker's  "  Political  Economy "  (advanced  course)  pp.  175-177, 
3d  Ed.     New  York,  1888. 

Pownall,  G.  H.,  article  "Crises,  Commercial  and  Financial," 
in  Palgrave's  '"Dictionary  of  Political  Economy."  Vol.  I. 
London,  1892. 

Schaffle,  Albert  E.  Friedrich,  "  Ban  und  Leben  des  sozialen 
Kdrpers."     4  Vols.     Tubingen,  188 1. 
Bd.  I,  p.  344;   II,  431  ff.  and  445  ff. 

"  Gesammelte  Aufsatze,"  Bd.  II,  pp.  23-137,  TUbingen, 

1886,  a  part  of  which  appeared  as  article  "Zur  Lehre 
von  den  Handelskrisen,"  in  "Zeitschrift  fur  die  gesammte 
Staatswissenschaft,"  Bd.  XIV,  TUbingen,  1858,  and  as 
article  "Der  grosse  Borsenkrach  des  Jahres  1873,"  in 
Bd.  XXX,  Tubingen,  1874. 

An  important  contribution  to  the  subject.  Among  other  things, 
the  fluctuation  in  the  price  of  the  precious  metals  is  treated  with 
reference  to  crises. 

article    "  Handelspolitik."    in    Bluntschli's    "  Deutsches 

Staatsworterbuch,"  Bd.  IV.    11  Vols.    Stuttgart,  1857-70. 

"  Das  Gesellschaftliche  System  der  Menschlichen  Wirth- 

schaft."     3  Aufl.     2  Vols.     Tubingen,  1873. 

Wagner,  Adolph,  article  "Krisen,"  in  Rentzsch's  "  Hand- 
worterbuch  der  Volksvvirthschaftslehre."  2  Aufl.  Leip- 
zig, 1870. 

An  especially  valuable  article.  The  influence  of  credit  is 
emphasized. 

White,  Horace,  article  "Commercial  Crises,"  in  Lalor's 
"  Cyclopedia  of  Political  Science,  Econoiny  and  Political 
History  of  the  United  States."    3  Vols.     Chicago,  1884. 

Wirth,  Maximilian  Wilhelm  Gottlob,  "  Geschichte  der  Han- 
delskrisen."    4  Aufl.     Frankfurt  a/M.,,  1890. 
The  standard  historical  work. 


226 


BIBLIOGRAPHY 


II.     THE  ECONOMIC  EQUILIBRIUM 

Gamier,  M.  Joseph,  "  Traitd  d'Economie  Politique  Sociale  ou 

Industrielle."     Paris,  1880. 

Especially  Sees.  363,  579,  et  scq.     Follows  the   presentation  of 

Max  Wirth. 
Nasse,  E.,  article  "  Ueber  die  Verhiitung  der  Produktions- 

krisen    durch    staatliche    Fursorge,"   in  ''Jahrbuch   fur 

Gesetzgebung,    Verwaltung     und     Volkswirthschaft    im 

deutschen  Reich."''     N.  F.,  Bd.  IIL     Leipzig,  1879. 
Roscher,  Wilhelm,  "  7,ur  Lehre  von  den  Absatzkrisen "  (first 

published  in  1849),  i"  '' Ansichten  der  Volkswirthschaft." 

3  Aufl.     Leipzig  u.  Heidelberg,  1878. 

Chief  authority  of  the  equilibrium  theory. 
"  Nationalokonomik  des  Handels  und  Gewerbfleisses." 

2  Aufl.     Stuttgart,  i88r.     Being  Bd.  Ill  of  "  System  der 

Volkswirthschaft." 

Especially  Abtheilung  II,  Kap.  XI. 


III.     THE  ORGANIZATION  OF  INDUSTRY 

Reference  may  be  made  to  much  of  the  literature  of  modern  social- 
ism. Upon  the  size  of  business  units  see  also  section  (c)  of  the 
bibliography  of  "  Crises  and  Legislation." 

Bebel,  "  Die  Frau  und  der  Socialismus."    10  Aufl.    Stuttgart, 

1890. 

Especially  p.  235  fF. 
Engels,   Friedrich,    "Herrn    E.    Dlihring's    Umwalzung   der 

Wissenschaft."    2  Aufl.     Zurich,  1886. 
'•  Socialism,   Utopian    and    Scientific "  (Ed.    by  Edw. 

Aveling).    London,  1892.     Social  Science  Series  No.  56. 
Contains  a  fine  description  of  the  phases  through  which  business 

passes  in  a  crisis  period. 
Engels-Marx,    "  Das    Kommunistische    Manifest."      4    Aufl. 

London  (German  Cooperative  Publishing  Co.),  1890. 
Kautsky,  K.,  "  Marx's  okonomische  Lehren."    Stuttgart,  1887. 

Pages  238  ff. 
KleinwacMer,  F.,  "Die  Kartelle."     Innsbruck,  1883. 

227 


BIBLIOGRAPHY 

Lexis,  article  "  Handel,"  in  Schonberg''s  "  Handbuch."   2  Aufl. 
Tlibingen,  1886. 
Especially  Bd.  I,  pp.  697-734,  and  Bd.  II,  pp.  734-737. 

Schultze-Gavernitz,  "•  Grossbetrieb  ein  wirthschaftlicher  und 
socialer  Fortschritt."     Leipzig,  1892. 

Smart,  William,  article  "The  Dislocations  of  Industry,"  in 
"Contemporary  Review,"  Vol.  LIII,  May,  1888. 

Watchel,  Friedrich,  "  Die  Versicherung  der  Actienrente,  Ein 
Praservativ  gegen  Borsen-  und  Handels-Krisen."  Leip- 
zig, 1874. 


IV.    CRISES  AND  THE  PROBLEM  OF  CAPITAL 

Aldis,  W.  Steadman,  article  "  Over-production  "  in  the  "  Con- 
temporary Review,"  Vol.  XXXV.     London,  April,  1879. 

Beaumont,  Henri  de,  article  "  Des  Fetes  comme  Remade  k  la 
Crise  Commerciale,"  in  "Journal  des  Economistes,"  Feb- 
ruary, 1886.     Sdrie  4,  Tome  XXXIII. 
Emphasizes  expenditure  as  necessary  to  maintain  trade, 

Bernhardi,  Th.,  "Versuch  einer  Kritik  der  Griinde,  die  fiir 
gross  und  klein  Grundeigentum  angefiihrt  werden."     St. 
Petersburg,  1849. 
Sec.  15.     Reviews  the  classical  doctrines  of  profits  and  surplus. 

Bowen,   Francis,    "  American    Political    Economy."    3d  Ed. 
New  York,  1863. 
Particularly  Chs.  XVII  and  XXIII. 

Chalmers,  Thomas,  "  On  Political  Economy  in  Connection 
with  the  Moral  State  and  Moral  Prospects  of  Society." 
2d  Ed.     Glasgow,  1832. 
Chs.  Ill  and  V.    Argues  for  the  possibility  of  a  general  glut. 

Courcelle-Seneuil,  Jean  Gustave,  "  Traite  Theorique  et  Pratique 
d'Economie  Politique."     Paris,  1858. 
Tome  I,  "  Partie  Theorique  ou  Ploutologie." 

Crocker,  Uriel  H.,  "  Excessive  Saving  a  Cause  of  Commercial 
Distress  :  being  a  Series  of  Assaults  upon  Accepted  Prin- 
ciples of  Political  Economy."     Boston,  1884. 

"The  Causes  of  Hard  Times."     Boston,  1895. 

228 


BIBLIOGRAPHY 

D'Avis,   article  "  Die  wirthschaftliche  Ueberproduktion  und 

die  Mittle  zu  ihre  Abhiilfe,"  in  "  Conrad's  Jahrbiicher," 

1888,  Bd.  XVII,  N.  F.,  pp.  465-490. 
Ely,' Richard  T.,  "Outlines  of  Economics"  (College  Edition). 

New  York,  1893. 
Guyot,  Yves,   "  Principles    of  Social   Economy "  (Trans,  by 

C.  H.  Lippington).  2d  Ed.    London  and  New  York,  1892. 
Hawley,  Fr.  B.,  article  "  The  Rationale  of  Panics,"  in  "  National 

Quarterly  Review,"  October,  1879. 
article  '"The  Ratio  of  Capital  to  Consumption,"  in  '•'I'Ta- 

tional  Quarterly  Review,"  Vol.  XXXIX,  July,  1879. 
"  Capital  and  Population."     New  York,  1882. 

Chs.  II,  III,  IV,  and  V. 
Hobson,  John  A.,  ''The  Evolution  of  Modern  Capitalism;  a 

Study  of  Machine  Production."     London,  1894. 

C'.i.  VII.     Presents  the  modern  doctrine  of  saving. 
McCuUoch,  John  Ramsay,  "  The  Principles  of  Political  Econ- 
omy."    London,  1870. 

Held  Say's  doctrine  of  the  impossibility  of  a  general  glut. 
Malthus,  T.  R.,  "  Principles  of  Political  Economy  considered 

with  a  View  to  their   Practical    Application."     2d   Ed. 

London,  1836. 

Bk.    I,  Ch.   V,  and   Bk.  II,  Ch.  I.     Chief  opponent  of  Say. 

Held  the  possibility  of  a  general  glut. 
Moffat,  R.  S.,  "The  Economy  of  Consumption;    an  Omitted 

Chapter  in  Political  Economy."     London,  1878. 
Mummery,  A.  F.,  and  J.  A.  Hobson,  "The  Physiology  of  In- 
dustry ;    an  Exposure  of  Certain  Fallacies  in  Existing 

Theories  of  Economics."     London,  1889. 
Rae,  John,  "  Statement  of  Some  New  Principles  on  the  Subject 

of    Political    Economy,    exposing    the    Fallacies   of    the 

System   of  Free   Trade  and  of  Some  Other   Doctrines 

maintained  in  the  'Wealth  of  Nations.'"     Boston,  1834. 

Bk.  II,  first  six  chapters. 
Rau,  Karl  Heinrich,  "  Malthus  und  Say  liber  die  Ursachen  der 

jetzigen  Handelsstockung."     Hamburg,  1821. 

Comprises    selections    from   the   principal    parts    of    Malthus' 

"  ftin.  of  Pol.  Econ.,"  London,  1820,  and  Say's  "  Open  Letters  to 
229 


BIBLIOGRAPHY 

Malthus,"  Paris,  1820,  together  with  a  comment  upon  the  arguments 

presented.     Rau  leans  toward  Malthus'  position. 
Robertson,  John  M.,  "  The  Fallacy  of  Saving."    London,  1892. 

Social  Science  Series  No.  52. 

Agrees  in  the  main  with  Hobson. 
Say,  Jean-Baptiste,  "  Cours  Complet  d'Economie   Politique 

Pratique."'     2d  Ed.     Paris,  1840. 

Part  III,  Ch.  XXXI.     Developed  the  theory  of  the  market. 
"  Lettres  h.  Malthus  sur  ditterents  sujets  d'economie  poli- 
tique, notamment  sur  les  causes  de  la  stagnation  gdndrale 

du  commerce."     Paris,  1820. 
Simonde   de   Sismondi,   Jean   Charles    Leonard,    "  Nouveaux 

Principes  d'Economie  Politique  ou  de  la  Richesse  dans 

ses  Rapports  avec  la  Population."     2d  Ed.     Paris,  1827. 

Liv.  II,  Chs.  IV,  V,  and  VI. 
Wells,  David  Ames,  article  "  The  Great  Depression  of  Trade," 

in  the   "Contemporary  Review,"  Vol   LII,  August  and 

September,  1887. 

V.     THE   WAGES   SYSTEM 

Part  of  the  literature  given  in  the  previous  section  may  be  consulted. 
Adier,   Georg,  "  Rodbertus,  eine  socialokonomische  Studie." 

Leipzig,  1884. 

A  very  valuable  essay. 
Bahr,    Hermann,    "  Rodbertus'    Theorie    der    Absatzkrise." 

Wien,  1884. 

Reprint  of  an  address. 
Brentano,  Ludwig  Joseph  (called  Lujo),  article  "  Die  Arbeiter 

und  die  Produktionskrisen,"  in  "Jahrbuch  fUr  Gesetzge- 

bung,  Verwaltung  und  Volkswirthschaft   im   deutschen 

Reich."     Bd.  II,  N.  F.,  1878. 

Contains  his  plan  for  the  insurance  of  the  wage-earning  classes 

against  crises.    This  plan  is  in  part  repeated   in   several  of  his 

other  works. 

"  Der  Arbeiter-Versicherungszwang."     Berlin,  i88r. 

"  Ueber  die  Ursachen  der  heutigen  socialen  Noth^    Ein 

Beitrag  zur  Morphologic  der  Volkswirthschaft."    2d  Aufl. 

Leipzig,  1889. 

230 


BIBLIOGRAPHY 

"  Die  Arbeiterversicherung  gemass  der  heutigen  Wirth- 

schaftsordnung ;   geschichtliche    und   okonomische  Stu- 
dien."     Leipzig,  1879. 

"  Arbeitsverhaltniss    gemass    dem    heutigen     Rechte." 

Leipzig,    1876.      Translated    by    Sherman,  —  "The   Re- 
lation of  Labor  to  the  Law  of  To-day."   New  York,  1891. 

George,  Henry,  "Progress  and  Poverty."  Bk.  V,  Ch.  L 
4th  Ed.     New  York,  1880. 

Hertzka,  Theodor,  "Die  Gesetze  der  sozialen  Entwickelung." 
Leipzig,  1886. 
Bk.  I,  Kap.  VIII.     "  Die  Ueberproduktion." 

"  Eine  Reise  nach  Freiland."     Leipzig,  1893. 

Kap.  X.    "  Unmdglichkeit  von  Krisen  in  Freiland."    A  social 
Utopia. 

Hobson,  John  A.,  article  "The  Economic  Cause  of  Unemploy- 
ment."  "  Contemporary  Review,"  Vol.  LXVII,  p.  744  ff. 

Mario,   Karl    (Karl   Georg  Winkelblech),  "  Untersuchungen 
Uber  die  Organisation  der  Arbeit  oder  System  der  Welt- 
okonomie."     2  Aufl.     4  Bde.     TUbingen,  1885. 
Especially  Bd.  I. 

Nicholson,  J.  Shield,  "  The  Effects  of  Machinery  on  Wages." 
Social  Science  Series  No.  54.     2d  Ed.     London,  1892. 

Osgood,  H.  L.,  article  "Scientific  Socialism"  (Rodbertus)  in 
"Political  Science  Quarterly,"  Vol.  I,  1886. 

Owen,  Robert,  "  Observations  on  the  Effects  of  the  Manufac- 
turing System."     London,  1817. 

Report.  Part  I  of  the  Twenty-Fourth  Annual,  entitled 
"Unemployment."  Bureau  of  Statistics  of  Labor  of 
Massachusetts.     Boston,  March,  1894. 

Rodbertus-Jagetzow,  Johann  Karl,  "  Capital,"  being  "  Vierter 
sozialer  Brief  an  von  Kirchmann"  (Ed.  by  A.  Wagner 
and  Th.  Kozak).     Berlin,  1885. 

The  crisis  theory  of    Rodbertus  is   frequently  repeated  in  his 
various  works. 

"  Zur    Erkenntniss    unserer   staatswirthschaftlichen  Zu- 

stande."     Neubrandenburg  and  Friedland,  1842. 

"  Zur  Beleuchtung  der  sozialen  Frage,"  being  "Erster  und 

dritter  sozialer  Brief  an  von  Kirchmann."     Berlin,  1885. 
231 


BIBLIOGRAPHY 

«  Zweitersozialer  Brief  an  von  Kirchmann."   Berlin,  1890. 

"  Zur  Erklanmg  und  Abhiilfe  der  heutigen  Creditnoth 

des  Grundbesitzes."     2  Aufl.     2  Bde.     Jena,  1876. 

"  Kleine  Schriften,"  especially  "  Die  Handelskrisen  der 

Grundbesitzer."     Berlin,  1890. 

Sargent,   William   L.,  "Robert  Owen   and    his  Social   Phi- 
losophy."    London,  i860. 

Villeneuve-Bargemont,  Alban  de,  "  Economie  Politique  Chr^- 
tienne,  ou  recherches  sur  la  nature  et  les  causes  du  Pau- 
pdrisme  en  France  et  en  Europe."     Paris,  1834. 
Tome  I,  Ch.  XII.     "  Des  Machines." 

Zuns,  "Einiges  uber  Rodbertus."     Berlin,  1883. 

VI.     CRISES  AND  LEGISLATION 
{a)     Bank  Legislation 

Bonnet,  Victor,  article  "La  Crise  Mondtaire  de  1863-64  et  ses 

Origines,"  in  "Revue  des  Deux  Mondes,"  November  15, 

1865. 

Favors  a  single  bank  of  note  issue. 

"  Question  Financiere  k  propos  des  crises."     Paris,  1859. 

Buchanan,  President,  "Message,"  December  8,  1857.     Sen. 

Ex.  Doc.  No.  II,  35th  Cong.,  ist  Session.     Washington, 

1858. 
Carey,  Henry  Charles,  "The  Credit  System  in  France,  Great 

Britain,  and  the  United  States."     Philadelphia,  1838. 

Recommends  freedom  in  banking.     Highly  praised  by  Coquelin. 
Clement,  Ambroise,   article   "Des  Crises   Commerciales,"  in 

"Journal  des  Economistes,"  Tome  XVII,  January,  1858. 

Favors  freedom  of  banking. 

"La  Crise  Economique."     Paris  (Guillaumin). 

Coquelin,    Charles,   article  "Les   Crises   Commerciales  et  la 

Libert^  des    Banques,"  in  "  Revue  des    Deux    Mondes " 

(Nouvelle  Serie),  Tome  XXIV,  November  i,  1848. 

One  of  the  chief  exponents  of  the  theory  of  freedom  in  bank  issue. 
Courcelle-Seneuil,  Jean  Gustave,  article  "De  la  Libert^  des 

Banques,"  in    "Journal    des    Economistes,"  2me    Sdrie, 

Tome  XLII,  May  15,  1864,  and  Tome  XLIII,  July  15. 
232 


BIBLIOGRAPHY 

Favors  competing  banks  of  issue,  admitting,  however,  that,  as 
banks  aid  progress  in  weahh,  they  assist  in  bringing  about  more 
frequent  crises. 

Guthrie,  George,  ''  Bank  Monopoly,  the  Cause  of  Commercial 
Crises."     Edinburgh,  1864. 

Mannequin,  Th.,  article  "  De  la  Libertd  des  Banques."  in 
"Journal  des  Economistes,"  2me  Serie,  Tome  XLI,  1864. 
Champion  of  freedom  in  banking. 

Roscher,  Wilhelm,  "  Nationalokonoinik  des  Handels  und 
Gewerbfleisses"  (especially  Sees.  69-70).  2  Aufl.  Stutt- 
gart, 1887. 

Wagner,  Adolph,  "  Finanzwissenschaft."  3  Aufl.  Leipzig,  1883. 
Especially  Buch  III,  Sees.  259-262  in  Bd.  I.     Best  resum6  of 
the   arguments   for  and  against   freedom  of   bank   issue.     Con- 
tains extensive  references  to  the  literature  of  the  subject. 

"  System  der  Zettelbankpolitik.'"    2  Aufl.    Freiburg,  1873. 

Wirth,  Maximilian  Wilhelm  Gottlob,  "  Handbuch  des  Bank- 
wesens."  3  Aufl.  Koln,  1883.  Being  Bd.  Ill  of  '•  Giund- 
zlige  der  National  Oekonomie." 

Wolowski,  L.,  article  "Des  Nouveaux  Dt^bats  sur  les 
Banques."  in  •'  Revue  des  Deux  Mondes,"  Tome  LV, 
Feb.  I,  1865. 

Principal  champion  of  monopoly  of  bank  issue  by  a  single  insti- 
tution under  state  control. 

"  La  Question  des  Banques."     Paris,  1864,  the  substance 

of  which  was  published  as  "  Question  des  Banques  "  in 
"Journal  des  Economistes,"  2me  Serie,  Tome  XLI,  Feb. 
15,  and  March  15,  1864,  and  Tome  XLII,  April  15. 

Contains  an  e.\tensive  collection  of  documents  bearing  upon 
the  subject. 

(b)     The  Peel  Bank  Act  of  1844 

General  reference  is  made  to  much  of  the  literature  given  under  the 
preceding  heading. 

Baring,  Alexander  (Baron  Ashburton),  "The  Financial  and 
Commercial  Crises  Considered."     3d  Ed.     London,  1847. 
Locates   the   cause  oi   crises  in  disturbances  of  the  currency. 
Opposed  to  the  Peel  Bank  Act. 

233 


BIBLIOGRAPHY 

Baxter,  Robert,  "Panic  of  1866,  with  its  Lessons  on  the  Cur- 
rency Act."     London,  1866. 

Bullion  Report  of  1810.  "  Report  of  English  Parliamentary 
Commission."  Text  to  be  found  in  Appendix  to  Sumner's 
"  History  of  American  Currency."     New  York,  1874. 

Cairnes,  John  Elliott,  "  An  Examination  into  the  Principles  of 
Currency  involved  in   the  Bank   Charter  Act  of  1844." 
Dublin,  1856. 
Argues  against  the  Peel  Bank  Act.     Is  highly  praised  by  Tooke. 

Fullarton,  John,  "  On  the  Regulation  of  Currencies,  being  an 
Examination  of  the  Principles  on  which  it  is  proposed  to 
restrict,  within  a  Certain  Fixed  Limit,  the  Future  Issues 
on  Credit  of  the  Bank  of  England  and  of  Other  Banking 
Establishments  throughout  the  Country."  London,  1844. 
Pronounced  one  of  the  clearest  opponents  of  the  theory  of  the 
Peel  Bank  Act. 

Mills,  John,  paper,  "The  Bank  Charter  Act  and  the  Late 
Panic,"  read  before  "National  Social  Science  Associa- 
tion" at  Manchester,  Oct.  5,  1866.  Published  separately, 
London,  1866. 

Defends  the  Bank  Act  and  claims  that  some  broader  and 
deeper  cause  must  be  found  to  account  for  the  occurrences 
of  crises. 

Mill,    John    Stuart,    "Principles     of    Political    Economy." 
American,  from  5th  London  Ed.     New  York,  1882. 
Especially  Bk.  Ill,  Ch.  XXIV. 

article,   "  The    Currency   Question,"   in    "  Westminster 

Review,"  June,  1844. 

Overstone,  (Lord)  Sam.  Jones  Loyd,  "Tracts  and  Other  Pub- 
lications  on   Metallic    and    Paper    Currency"    (Ed.    by 
J.  R.  McCulloch).     London,  1858. 
Chief  authority  of  the  Currency  School. 

Palmer,  J.  Horsley,  "  The  Causes  and  Consequences  of  the 
Pressure  upon  the  Money  Market ;  with  a  Statement  of 
the  Action  of  the  Bank  of  England  from  ist  October, 
1833,  to  27th  December,  1836."     London,  1837. 

Tooke,  Thomas,    and   William    Newmarch,   "A    History   of 
Prices."     6  Vols.     London,  1857. 
234 


BIBLIOGRAPHY 

The  authority  of  first  importance  upon  the  subject  of  the  Peel 
Bank  Act. 

Torrens,  Colonel  Robert,  "  The  Principles  and  Practical  Opera- 
tion of  Sir  Robert  Peel's  Act  of  1844  explained  and 
defended."     3d  Ed.     London,  1858. 

"  A  Letter  to  the  Right  Honourable  Lord  Viscount  Mel- 
bourne, on  the  Causes  of  the  Recent  Derangement  in  the 
Money  Market  and  on  Bank  Reform."  2d  Ed.  Lon- 
don, 1837. 

"  '  The  Budget,'  a  Series  of  Letters  on  Financial,  Com- 
mercial, and  Colonial  Policy."     London,  1844. 
Discusses  the  crisis  of  1841-42. 

Wagner,  Adolph,  *'  Die  Geld-  und   Credittheorie  der  Peel'- 
schen  Bankacte."     Wien,  1862. 
The  most  scholarly  and  systematic  presentation  of  the  subject. 


(c)    Miscellaneous  Legislative  Provisions 

General   reference  is  made  to   the  works  given  under  the  heading 
"  Credit  and  Speculation." 

Anonymous,  "  The  Profit  of  Panics ;  showing  how  Financial 
Storms  arise,  wlio  make  Money  by  them,  .  .  .  and  Other 
Revelations  by  a  City  Man."     London,  1866. 

By  the  author  of   "  Bubbles   of    Finance,"   also   anonymously 
published.    See  under  "  Credit  and  Speculation." 

Benton,  T.  H.,  "Thirty  Years'  View."     New  York,  1854. 

Vol.  II,  Chs.  XIII  and  XIV,  pp.  43-56.    Discussion  of  Bank- 
ruptcy Laws  in  the  United  States. 

Campbell,  R.  V.,  ''Principles  of  Mercantile  Law."  2d  Ed. 
Edinburgh,  1890. 

Crump,  Arthur,  "  A  New  Departure  in  the  Domain  of  Politi- 
cal Economy."    2d  Ed.     London,  1881. 

Particularly  Part   I,   Ch.   IX,  "The   Influence   of  Joint  Stock 
Limited  Liability  Companies  upon  Production." 

Dunscomb,  S.  W.,  "Bankruptcy;  a  Study  in  Comparative 
Legislation."  Columbia  College  Studies  in  History, 
Economics,  and  Public  Law.  Vol.  II,  No.  2.  New  York, 
1893. 

235 


BIBLIOGRAPHY 

Evans,  D.  M.,  "  Facts,  Failures,  and  Frauds ;  Revelations, 
Financial,  Mercantile,  Criminal."     London,  1859. 

Griffin,  R.,  "Stock  Exchange  Securities;  an  Essay  on  the 
General  Causes  of  Fluctuations  in  their  Prices."  London, 

1879- 
Kleinwachter,  Fr.,   in   Schbnberg's   "  Handbuch,"   Bd.    I,  3 
Aufl.  3  Bde.     Tubingen,  1890-91. 

Especially  Part  I,  Ch.  V,  Sub-division  III,  Sees.  27-34,  Dis- 
cusses the  advantages  and  defects  of  various  forms  of  business 
undertaking. 

Oechelhauser,  W.,  "  Die  Nachteile  des  Aktienwesens  und  der 
Reform  der  Gesetzgebung."     1876  and  1878. 

Oliphant,  Laurence,  article  "The  Autobiography  of  a  Joint 
Stock  Company  (Limited)."  Blackwood's  Magazine, 
July,  1876,  Vol. 'CXX. 

SchafQe,  Albert  Eberhard   Friedrich,  article  "Die  Anwend- 
barkeit   der  verschiedenen    Unternehmungsformen,"   in 
"  Zeitschrift  fiir  die  Gesammte  Staatswissenschaft,"  Jahr- 
gang  1869. 
Best  treatment  of  the  subject  of  forms  of  business  organization. 

"  Verhandlungen,  Die,  des  elften  Kongresses  deutscher  Volks- 
wirthe,"  held  in  Mainz,  September  i,  2,  3.  and  4,  1869. 
Report  of  proceedings  in  Faucher's  "  Vierteljahrsschrift 
fiir  Volkswirthschaft  und  Kulturgeschichte,"  Jahrgang 
1869.  Bd.  III. 
Upon  the  subject  of  joint  stock  companies. 

"Verhandlungen,  des  Vereins  fiir  Socialpolitik  am  12  u.  13 
October,  1873,"  Bd.  IV  of  "Schriften"  des  Vereins. 
Leipzig,  1874. 

Concerning  joint  stock  companies.  Contains  Wagner's  thirty- 
two  theses. 

VTI.     PERIODICITY   OF   CRISES 

A  few  astronomical  works  are  cited  which  deal  especially  with  the 
phenomena  involved  in  this  theory. 

Benner,  Samuel,  "  Benner's  Prophecies  of  Future  Ups   and 
Downs  in  Prices."    3d  Ed.     Cincinnati,  1884. 
236 


BIBLIOGRAPHY 

Boccardo,  Gerolamo,  "  Economia  Politica."     6th  Ed.     Turin, 
1879. 
Vol.  II,  pp.  127-157. 

article  "  La  Legge  de  Periodicita  della  Crisi-Perturbazioni 

Economiche  e  Macchie   Solari,"  in  "Archivio  di  Stitis- 
tica,"  Anno  III.     Roma,  1879. 

Carr,  Nathan  T.,  "  The  Sun  :  Its  Constitution  ;  Its  Phenomena ; 
Its  Condition."     New  York,  1883. 
Especially  Sec.  25,  "  Periodicity  of  Sun-spots." 

Carrington,  R.  C,  "Observations  of  the  Spots  on  the  Sun 
from  November  9,  1853,  to  March  24,  1861."  London, 
1863. 

The  author  compares  the  frequency  of  sun-spots  with  the  price 
of  wheat. 

Hazen,  H.  A.,  article  "  Sun-spots  and  Predictions,"  in  "  Sci- 
ence," Vol.  XVI,  pp.  29-33,  July  18,  1890. 

Herschel,  Sir  William,  "  Observations  tending  to  investigate 
the  Nature  of  the  Sun,  etc."  Philosophical  Transactions 
of  the  Royal  Society,  Vol.  XCI.     London,  1801. 

Page  265  ff.     Contains   perhaps    the   earliest   suggestion  of  the 
connection  between  sun-spots  and  the  variations  of  harvests. 

Hunter,  W.  W.,  and  J.  Norman  Lockyer,  article  "  Sun-spots 
and  Famines,"  in  "  Nineteenth  Century,"  November,  1877. 
Vol.  lUpp.  583-602.    Concerning  periodicity  of  famines  in  India, 

Jevons,  W.  Stanley,  "Investigations  in  Currency  and  Finance." 
London,  1884. 

Chs.  I,  V,  VI,  VII,  and  VIII.     Mr.  Jevons  is  mainly  respon- 
sible for  bringing  this  discussion  into  economic  literature. 

Kedzie,  J.  H.,  "Speculations,  Solar  Heat,  Gravitation,  and 
Sun-spots."     Chicago,  1886. 
Part  III. 

Young,  C.  A.,  "The  Sun  and  the  Phenomena  of  its  Atmos- 
phere," in  "  Half  Hours  with  Modern  Scientists."  Sec- 
ond Series.     New  Haven,  Conn.,  1873. 


237 


BIBLIOGRAPHY 

VIII.     CREDIT   AND   SPECULATION 

Reference  may  be  made  to  the  literature  in  tlie  next  section  of  the 
bibUograpliy. 

Anonymous,  "The  Bubbles  of  Finance:  Joint  Stock  Compa- 
nies, promoting  of  Companies,  Modern  Commerce,  Money 
Lending,  and  Life  Insuring,"  by  a  city  man.  London, 
1865. 

By  the  author  of  "  Profits  and  Panics,"  also  anonymously  pub- 
lished (see  VI  (c)  of  this  bibliography). 

Anonymous,  "  Rationale  of  Market  Fluctuations."     London, 

1875. 
Anonymous,  "  Market  Fluctuations,"  by  a  city  editor.    London, 

1876. 
Cohn,  Gustav,  article  "  Zeitgeschafte  und  DifFerenzgeschafte," 

in    Hildebrand's  "  Jahrbiicher,"   Bd.  VII,   and    Bd.  IX, 

1866. 
Consular  Reports,  Symposium  on  "Debts  of  Honor";  how 

they  are   considered  in  various   countries.     Vol.  XLII. 

August,  1893. 
Crump,  Arthur,  "The  Key  of  the  London  Money  Market." 

6th  Ed.     London,  1877. 

Contains  a  concise  review  of  the  history  of  the  money  market 

during  the  last  century,  with  tables  of  the  accounts  of  the  Bank  of 

England. 
"  Theory  of  Stock  Exchange  Speculation."     London, 

1874;  New  York,  1887. 
American  Edition  edited  by  H.  W.  Rosenbaum.     An  accurate 

and  suggestive  description  of  speculative  methods. 
Evans,  D.  M.,  "  Speculative  Notes  and  Notes  on  Speculation, 

Ideal  and  Real."     London,  1859. 
Gamier,  J.,  article  "De  la  Nature  des  Operations  de  Bourse 

at  de  I'Agiotage,"  in  "  Journal  des  Economistes,"  Tome 

XLII,  p.  378.     Paris,  1864. 
Gibson,  G.  Rutledge,  "  Stock  Exchanges  of  London,  Paris, 

and  New  York;  a  Comparison."     New  York,  1889. 
Glagau,  "  Der  Borsen-  und  Grlindungsschwindel  in  Berlin." 

Leipzig,  1873. 

238 


BIBLIOGRAPHY 

"  Der  Borsen-  und  Griindungsschwindel  in  Deutschland." 

Leipzig.  1877. 
Holtzendorff,  Franz  von,  "Wesen  und  Werth  der  Oeffentlichen 

Meinung.''     Munchen,  1879. 
Hume,  John  F.,  article  "  Tlie  Heart  of  Speculation,"  in  the 

"Forum,"  Vol.  II,  pp.  130-141,  October,  1886. 

A  description  of  stock  exchange  methods. 
Knies,  Karl,  "Credit."     Being  the  second  part  of  "Geld  und 

Credit."     2  Aufl.     Berlin,  1873-79. 
Mangoldt,  Hans  Karl  Emil  von,  article  "  Kredit,"  in  Bluntschli's 

"  Deutsches  Staatsworterbuch,"  Bd.  VI. 
Michaelis,  Otto,  article  "  Die  wirthschaftliche  Rolle  des  Spec- 

ulationshandels,"   in    Faucher's   "  Vierteljahrsschrift   fur 

Volkswirthschaft,"  Bd.  IV,  pp.  130-172,  1864,  and  Bd.  I, 

pp.   196-210,  and  Bd.  II,  pp.  77-110,  1865.      Forming 

also  Bd.  II  of  "  Volkswirthschaftliche  Schriften."    BerHn, 

1873- 

A  very  able  treatise  upon  speculation. 
Rogers,   J.  E.  T.,  "  Industrial   and   Commercial    History  of 

England."     London,  1892. 

Ch.  IV,    "  The  Development  of  Credit  Agencies." 
SchafCle,  Albert  E.  F.,  article  "  Die  Handelskrisis  mit  beson- 

derer   Riicksicht    auf    das    Bankwesen,"   in   "  Deutsche 

Vierteljahrsschrift,"  Heft  I,  1858. 

Misuse  of  credit  the  cause  of  crises ;  economic  morality  the  cure. 
"  Bau  und  Leben  des  sozialen  Korpers."   TUbingen,  1875. 

Bd.  I,  p.  452  ff. 
Stein,  Lorenz   von,    "  Lehrbuch    der   Volkswirthschaft,"   pp. 

225-230.     Wien,  1858  ;  or  pp.  424-448,  Ed.  Wien,  1878. 
Stevens,  Albert  Clark,  article  "  The  Utility  of  Speculation,"  in 

"Political  Science  Quarterly,"  Vol.  VII,  September,  1892. 

Radically  defends  speculation. 

IX.     THE   PSYCHOLOGY   OF   CRISES 

Consult  the  preceding  section. 

Anonymous,  article   "Great   Awakenings,"  in  the  "Galaxy," 
Vol.  VI,  pp.  388-398.     New  York,  1868. 

239 


BIBLIOGRAPHY 

Discusses  the  revivals  of  religion  in  New  York  City  and  else- 
where in  1857,  following  upon  the  crisis  of  that  year. 

Adams,  Charles  Francis,  "Massachusetts,  its  Historians  and  its 
History  ;  an  Object  Lesson."  Boston  and  New  York,  1893. 

Bain,  Alexander,  "The  Emotions   and  the  Will."    3d  Ed. 
London,  1875. 
Reprint,  New  York,  1876. 

Bourne,  H.  R.  F.,  "Romance  of  Trade."    London,  1868. 
Especially  Ch.  XI  for  account  of  early  panics  and  manias. 

Catteneo,  "  Delia  Psicologea  della  nienti  Associate,"  in  "  Atti 
del  Regio  Institute  Lombardo,"  Vol.  Ill,  1862. 
Upon  the  psychology  of  public  opinion. 

Drake,  Samuel  G.,  "The  Witchcraft  Delusion  in  New  Eng- 
land."    Roxbury,  Mass.,  1866. 
Woodward's  Historical  Series,  Nos.  5,  6,  and  7. 

Fry,  Edward,  article  "  Imitation  in  Human  Progress,"  in  the 
"Contemporary  Review,"  Vol.  LV,  pp.  658-677,  May, 
1889. 

Hecker,  J.  F.  C,  "The  Epidemics  of  the  Middle  Ages."  3d  Ed. 
London,  1859. 
Translated  by  B.  G.  Babington,  M.D.,  F.R.S. 

Langton,  William,  "  Observations  on  a  Table  showing  the 
Balance  of  Account  between  the  Mercantile  Public  and 
the  Bank  of  England,"  in  Transactions  of  Manchester 
Statistical  Society,  1857-58  ;  also  republished  as  appendix 
to  "Transactions,"  1875-76. 
Suggests  moral  causes  as  explaining  crises. 

Lorimer,  J.  G.,  D.D.,  "The  Great  American  Revivals." 
Glasgow,  1859. 

Mackay,  Charles,  LL.D.,  "  Memoirs  of  Extraordinary  Popular 
Delusions  and  the  Madness  of  Crowds."  2d  Ed.  2  Vols. 
London,  1852. 

Mills,  John,  "  Credit  Cycles  and  the  Origin  of  Commercial 
Panics,"  in  Transactions  of  the  Manchester  Statistical 
Society,  1867-68. 

Traces  the  psychology  of  credit  in  relation  to  crises. 
Moll,  Albert,  "Hypnotism."     London,  1890. 
Contemporary  Science  Series. 

240 


BIBLIOGRAPHY 

Oechelhauser,  Wilhelm,  "  Die  wirthschaftliche  Krisis."    Berlin, 

1876. 
Southey,  Robert,  "  The  Life  of  Wesley ;   and  the  Rise  and 

Progress  of  Methodism."     London,  1871. 

Bohn's  Standard  Library. 
Sully,  James,  "  Illusions  :  a  Psychological  Study."   Especially 

Ch.  XI,  "  Illusions  of  Belief."     New  York,  1881. 

International  Scientific  Series. 
Tarde,  G.,  "  Les  Lois  de  I'lmitation."     Paris.  1890. 
Taylor,  Isaac,  "  Natural  History  of  Enthusiasm."    8th  Ed. 

London,  1842. 
Upham,  Rev.  Charles  W.,  "  Salem  Witchcraft."     Boston,  1867. 
"  Lectures  on  Witchcraft,  comprising  a  History  of  the 

Delusions  in  Salem  in  1692."     2d  Ed.     Boston,  1832. 
Wendell,  Barrett,  ''Cotton  Mather,  the  Puritan  Priest."    New 

York,  1891. 


X.     MISCELLANEOUS  WORKS  UPON  CRISES 

Allard,  "  La  Crise,  La  Baisse  des  Prix,  La  Monnaie."  Brux- 
elles,  1885. 

Bagehot,  Walter,  "  Lombard  Street ;  a  Description  of  the 
Money  Market."  Being  Vol.  V,  pp.  1-2 16,  of  Complete 
Works  issued  in  5  Vols,  by  The  Traveler's  Ins.  Co., 
Hartford,  Conn.,  1891. 

Berliner,  Adolf,  "  Die  wirthschaftliche  Krisis,  ihre  Ursachen 
und  ihre  Entwickelung."     Hannover,  1878. 

Bilgram,  Hugo,  "  Involuntary  Idleness.  An  Exposition  of 
the  Causes  of  the  Discrepancy  existing  between  the 
Supply  of  and  the  Demand  for  Labor  and  its  Products." 
Philadelphia,  1889.  See  also  brief  report  of  a  paper 
read  before  the  American  Economic  Association,  Dec.  29, 
1888,  in  the  proceedings  of  that  Association. 

Advocates  an  expansion  of  the  currency,  which,  in  reducing 
interest  shall  reduce  the  profit  necessary  for  marginal  producers 
who  must  borrow,  and  hence  will  raise  wages. 

Block,  Maurice,  article,  "  La  Crise  Economique,"  in  "  Revue 
R  241 


BIBLIOGRAPHY 

des    Deux    Mondes,"    March    15,    1879,   Tome   II,   pp. 

433-459- 

Troisifeme  Periode,  Tome  XXXII. 

Biisch,  Johann  Georg,  "  Gescliichtliche  Beurtheilung  der  am 
Ende  des  achtzehnten  Jahrhunderts  entstandenen  grossen 
Handelsvcrwirrung,"  contained  in  Bd.  VII  of  '^  Siimmt- 
liche  Schriiten,"  16  Bde.     Wien,  1813-18. 

Busch,  Ernst,  "Ursprung  und  Wesen  der  Wirthschaftlichen 
Krisen  und  Angabe  der  Mittel  zu  ilirer  Beseitigung." 
Leipzig,  1892. 

Cannan,  Edwin,  "  A  History  of  the  Theories  of  Production 
and  Distribution  in  English  Political  Economy  from  1776 
to  1848."     London,  1894. 

This  book,  with  that  01  Held,  is  indispensable  for  an  un- 
derstanding of  the  significance  of  tlie  theories  of  English 
Economy. 

Callender,  W.  R.,  Jr.,  "The  Commercial  Crisis  of  1857,  its 
Causes  and  Results  ;  being  the  Substance  of  a  Paper  read 
before  the  Manchester  Statistical  Society,  with  an  Appen- 
dix containing  a  List  of  upwards  of  260  English  Failures 
in  1857-58."     44  pp.     London,  1858. 

Carey,  Henry  Charles,  "  Financial   Crises,  their   Causes  and 
Effects."     Philadelphia,  1864. 
Sees  in  free  trade  the  cause  of  financial  crises. 

Chitti,  "  Des  Crises  Financieres  et  de  la  Reforme  du  Systeme 
Monetaire."     Bruxelles,  1839. 

Commissioner  of  Labor,  First  Annual  Report  of,  entitled  "  In- 
dustrial Depressions."     Washington,  1886. 

Craik,  Dinah  Maria,  "  John  Halifax,  Gentleman."    New  York, 
1870. 
Containing  a  lively  description  of  the  crisis  of  1825. 

Bort,  L.  Muret  de,  "Crise  Mondtaire.  De  la  Situation  Re- 
spective des  Grands  Etats  Commer9ants,  de  la  Crise,  et 
de  ses  Causes,  du  Role  important  de  la  Monnaie." 
Paris,  1856. 

Diihring,  Eugen  Karl,   "  Kritische  Grundlegung  der  Volks- 
wirtschaftslehre."     Berlin,  1866. 
Especially  pp.  242-268. 

242 


BIBLIOGRAPHY 

"  Kursus  der  National-  und  Sozialokonomie."   Abschnitt 

IV,  Kap.  I.     Berlin,  1873. 

Evans,  D.  Morier,  "  The  History  of  the  Commercial  Crisis, 
1857-58,  and  the  Stock  Exchange  Panic  of  1859."  Lon- 
don, 1859. 

'"Commercial  Crises  1847-48.'"     London,  1848. 

Faucher,  L.,  "  Etudes  sur  TAngleterre.'"     Paris,  1856. 
Especially  Tome  I,  pp.  360-383. 

Frewen,  Moreton,  B.A.,  "  The  Economic  Crisis."  London, 
1888. 

Mr.  Frewen  sees  in  the  demonetization  of  silver  and  the  appre- 
ciation of  gold  the  cause  of  crises. 

Geyer,  Ph..  *' Banken  und  Krisen :  eine  Studie."  Leipzig, 
1865. 

Gibbons,  J.  S.,  "The  Banks  of  New  York,  their  Dealers,  the 
Clearing  House,  and  the  Panic  of  1857."  New  York, 
1858. 

Giffen,  Robert,  "Essays  in  Finance."  ist  Series,  5th  Ed. 
London,  l8go;  2d  Series,  5th  Ed.     New  York,  1886. 

Goadly,  Edward,  and  W.  Watt,  "Present  Depression  in 
Trade ;  its  Causes  and  Remedies,"  with  preface  by  Leon 
Levi.  Being  the  Pears'  Prize  Essays,  read  before  the 
British  Association  for  the  Advancement  of  Science, 
September,  1885.     London,  1885. 

Held,  Adolf,  "Zwei  Bucher  zur  sozialen  Geschichte  Englands." 
Leipzig,  1 88 1. 

Important  in  explaining  the  connection  between  English  eco- 
nomics and  politics. 

article  "  Handelskrisen,"  in  Loning's  edition  of  Blunt- 

schli's  "Staatsworterbuch."    Bd.  II,  pp.  173-180.     Leip- 
zig and  Stuttgart,  1876. 

Herkner,  Heinrich,  "Die  Oberelsassische  Baumwollindustrie 
und  ihre  Arbeiter  auf  grand  der  Thatsachen  dargestellt." 
Strassburg,  1887. 
Particularly  Kap.  XIV. 

"  Die    sozial    Reform    als    Gebot   der  wirtschaftlichen 

Fortschrittes."     Leipzig,  1891. 
Pages  33-96. 

243 


BIBLIOGRAPHY 

Hermann,    F.    B.    W.    von,     "  Staatswirtschaftliche     Unter- 

suchung."     2  Aufl.     Munchen,  1870. 

Page  631  ff. 
Hooper,  Wynnard,  essay  "  The  Influence  of  State  Borrowing 

on  Commercial  Crises."  Being  Ch.  V  in  "  A  Policy  of  Free 

Exchange,"  edited  by  Thomas  Mackay.     London,  1894. 
Issaiev,  A.  A.,  article  "  Les  Principales  Causes    des   Crises 

Economiques,"  pp.   654-692   and  985-101 1    in  "Revue 

d'Economie  Politique,"  Tome  VII,  1893. 
Leroy-Beaulieu,  Pierre  Paul,  "  Das  sinken  der  Preise  und  die 

Welthandels  Krisis."     Berlin,  1886. 

Uebersetzt  durch  E.  V.  Kalckstein. 
McCulloch,  J.  C,  article  "Crisis  in  the  American  Trade,"  in 

"Edinburgh  Review,"  Vol.  LXV,  July,  1837. 
Macpherson,  "Annals  of  Commerce."  4  Vols.    London,  1805. 

Consult  especially  for  account  of  early  crises  and  manias. 
Meyer,    R.,    "Politische    Griinder  und    die    Korruption    in 

Deutschland."     Leipzig,  1877. 
Michaelis,  0.,  article  "Die   Krisis  von   1857,"  in   Pickford's 

"  Monatsschrift,"  Bde.  1-3.     Erlangen,  1858-59. 
Morisseaux,  Charles,  "La  Crise  Economique."     Paris,  1884. 
Neumann-Spallart,   Franz    Xavier    von,    "  Uebersichten    der 

Weltwirtschaft."     Stuttgart,  1879. 

Especially  Jahrgang  1879,  upon  the  crisis  of  1873. 
Neuwirth,  Joseph,  "Die  Speculationskrisis  von  1873,"  being 

Bd.  II  of  "Die  Bank  und  Valuta  in  Oesterreich-Ungarn, 

1862-72."     2  Bde.     Leipzig,  1874. 
Patterson,  R.  H.,  article  "Bad  Trade  and  its  Cause,"  in  "Con- 
temporary Review,"  Vol.  XXXV,  April,  1879. 
Playfair,  Sir  Lyon,  article  "  The  Progress  of  Applied  Science 

in  its  ei^ect  upon  Trade,"  in  "  Contemporary  Review," 

Vol.  LIII,  March,  1888. 

Discusses  over-production  and  machinery. 
Salomons,  David,  "  A  Defence  of  the  Joint  Stock  Banks :  an 

Examination  of  the   Causes  of  the   Present   Monetary 

Difficulties,  and  Hints  for  the  Future  Management  of  the 

Circulation."     2d  Ed.     London,  1837. 
244 


BIBLIOGRAPHY 

Scudder,  M.  L.,  Jr.,  "Congested  Prices."     Chicago,  1883. 
Smith,  R.  H.,  "  The  Science  of  Business."    London  and  New 

York,  1888. 
Smith,  Walter  E.,  "  The  Recent  Depression  of  Trade ;   its 

Nature,  its  Causes,  and  the  Remedies  which  have  been 

Suggested  for  it."     London,  1880. 

Cobden  Club  prize  essay  for  1879. 
Stevens,  Albert  C,  article  "  Phenomenal  Aspects  of  the  Fi- 
nancial Crisis,"  in  "  Forum,"  Vol.  XVI,  September,  1893. 
Emphasizes  the  conservative  nature  of  business  in  the  United 

States  immediately  preceding  the  crisis  of  1893. 
Stopel,  F.,  "  Die  Handelskrisis  in  Deutschland,"  being  Heft  I 

of    his   "  Volkswirthschaftliche   Zeitfragen."      Frankfurt 

a/M.,  1875. 
Struck,  E.,  article  "Zur  Geschichte  der  Pariser  Borsenkrisis 

vom  Jahre  1882,"  in  "Jahrbuch  flir  Gesetzgebung.  Ver- 

waltung   und    Volkswirthschaft    im    deutschen    Reich." 

N.  F.,  Bd.  VIL     Leipzig,  1883. 
Testelin,  E.  A.,  '•  Economic  Politique ;  dtude  sur  la  crise  in- 

dustrielle,  commerciale,  et  agricole."     Bruxelles,  1885. 
Toynbee,  Arnold,  "  Lectures  on  the  Industrial  Revolution  of 

the  Eighteenth  Century  in  England."     With  Memoir  by 

B.  Jewett.     New  York,  1890. 
Wallace,  A.  R.,  "  Bad  Times."    London  and  New  York,  1885. 
See  as  the  causes  of  industrial  depression  for  England  —  foreign 

loans,  war  expenses,  rural  depopulation,  millionnaires,  speculation, 

dishonesty,  private  property  in  land,  etc. 
Wasserrab,   Karl,   "Preise   und    Krisen."      Stuttgart,    1889. 

Coinprising  "  Die  Wirthschaftskrisen  und  die  Entwicke- 

lung   der  Krisis  von    1873,"  published  also  separately. 

Stuttgart,  1889. 
Willson,    H.    B.,    "Industrial    Crises:     Their    Causes    and 

Remedy."    Washington,  1879. 


245 


INDEX 


Adams,  C.  F.,  effect  of  concentra- 
tion of  interest  in  religious  mat- 
ters, 193,  194. 

Adams,  H.  C,  uncertain  indus- 
tries and  taxes,  25. 

Agriculture,  stability  of,  24. 

Bacon,  optimistic  expectations,  190. 

Bagehot,  excessive  activity  of  this 
generation,  199;  economization 
of  cash,  142;  sun-spot  and  har- 
vest theory,  135. 

Balance  of  trade,  29. 

Bank,  public  financiering  through  a 
state  bank,  105  ;  reduction  of  re- 
serves begins  a  crisis,  105 ;  func- 
tions of,  107 ;  relative  importance 
of  banks  for  crises,  108  ;  charters, 
108 ;  examination,  109 ;  state- 
ments, 108;  duties  of  directors, 
109,  no;  of  France,  in,  114; 
note  issue,  111-116;  of  England, 
114;  overemphasized,  116;  and 
the  standard  of  punctuality,  161 ; 
credit  and  crises,  162;  stingy, 
170;  and  stock  exchange,  170. 

Bankruptcy,  two  conceptions  con- 
trolling legislation,  126,  127 ;  dis- 
honest, 127,  128;  voluntary  and 
involuntary,  128 ;  hindrance  to 
discharge,  128, 129. 

Belief  effected  by  action,  198. 

Bellamy,  49,  50. 

Boccardo,  sun-spot  theory  of  perio- 
dicity, 135. 

Brentano,  voluntary  insurance,  98- 

lOI. 


Bullion  Committee,  116. 

Capital,  r61e  of,  since  the  "  Indus- 
trial Revolution,"  58 ;  "  use  of 
capital  "  in  broad  sense,  65,  66 ; 
makes  the  productive  process 
roundabout,  69 ;  proper  distribu- 
tion of,  in  investment  difficult, 
70,  71 ;  can  be  used  to  solve  its 
own  problem,  79. 

Captains  of  industry,  and  uncer- 
tain economic  conditions,  49 ; 
and  crises,  222. 

Carey,  theory  of  bank-note  issue, 

US- 
Causes  of  crises,  13,  14;  list  of,  by 
Max  Wirth,  23 ;  settlement  of 
balance  of  trade,  29 ;  accidental, 
Ch.  II;  Roscher  on,  35;  Von 
Stein  and  credit,  157. 

Chalmers,  on  saving,  78. 

Chance,  in  relation  to  speculation 
and  gambling,  166. 

Chevalier,  government  interfer- 
ence with  a  state  bank,  114. 

Clearing-house,  certificates,  106 ; 
control  of  banks,  no. 

Combination,  to  regulate  supply 
and  demand,  52. 

Commerce,  new  routes  of,  26. 

Competition,  over-production,  49; 
intensified  by  an  element  of  pug- 
nacity, 72;  of  banks  in  note 
issue.  III,  112;  of  banks  of 
issue  a  mutual  check,  115. 

Conceit,  fatal  in  speculation,  170, 
171. 


247 


INDEX 


Concentration,  of  wealth  and  un- 
stable demand,  32;  of  industry, 
42 :  and  effect  of  crises  on  em- 
ployers, 42;  effect  on  business 
judgments,  204,  205. 

Condorcet,  plan  of  insurance,  loi. 

Consolidation,  following  crises,  51. 

Consumption,  the  study  of,  neg- 
lected, 74  ;  Engel's  laws,  38,  39. 

Control,  lack  of  organs  of  eco- 
nomic, 41 ;  application  of  capi- 
tal to  the  problem  of,  47 ;  private 
property,  48 ;  through  stock  ex- 
changes, 53 ;  through  commer- 
cial agencies,  54. 

Corporations,  charters,  121 ;  safe- 
guards in  founding,  121 ;  control 
by  stockholders,  122;  demo- 
cratic principle,  122;  voting 
power  of  shares,  122,  123;  issue 
of  stock  without  full  payment  of 
capital,  123 ;  limit  of  borrowing 
power,  123,  124;  public  record 
of  share  ownership,  124. 

Credit,  emphasized  by  Wagner,  6 ; 
and  crises,  24;  growth  of,  and 
crises,  153 ;  separates  demand 
and  supply,  154;  Lorenz  von 
Stein,  15s ;  uses  of,  155,  156 ; 
Adam  Smith  on,  156;  dangers 
of,  157 ;  Rodbertus  ignores,  157 ; 
and  unwise  consumption,  158; 
for  short  periods  only,  160; 
ethics  of  use  of  money  of  others, 
161,  162;  and  trustworthiness, 
16s,  178. 

Crisis,  definition,  3;  descriptions 
of,  2,3;  classification,  5  ;  Wirth's 
classification,  6;  importance  of 
study,  7 ;  nineteenth  century 
phenomenon,  8,  23;  territorial 
distribution,  9;  Teutonic  nations, 
9  ;  democracies,  9  ;  table  of,  10 ; 
whether  increasing,  11;  place  of 
subject  in  Political  Economy, 
11-13;  of  1893  ^''^'^  monetary 
legislation,  30;    coincident  with 


modern  wage-earners'  problem, 
81 ;  list  of,  137  ;  Jevons'  list,  144  ; 
and  revivals  of  religion,  209,  210; 
loss,  220,  221 ;  and  captains  of 
industry,  222. 
Currency  School,  116,  117. 

Demand,  instability  of,  31,  32;  di- 
vergence of  law  of  production 
and  consumption,  31 ;  uncer- 
tainty of,  44. 

Depression,  contrasted  with  crisis, 

4.5- 

De  Tocqueville,  crises  and  democ- 
racies, 9. 

Diminishing  returns,  law  of,  59. 

Directors  of  banks,  duties  of,  log, 
no. 

Distribution  of  wealth,  unequal, 
furthers  over-investment,  73 ; 
crises  and  inequalities  in,  222. 

Division  of  labor  and  coordination 
of  demand  and  supply,  43. 

Education,  212-215. 

Ely,  R.  T.,  treatment  of  crises,  12. 

Emotions,  transfer  of,  208,  209;  in- 
fluence of,  on  judgment,  185  ff. ; 
influence  on  recollecdon,  186- 
188;  influence  on  expectation, 
188;  the  haste  to  be  rich,  206, 
207. 

Employment  given  by  state  during 
a  crisis,  36. 

Epidemics,  religious,  193,  194. 

Equilibrium  of  demand  and  sup- 
ply, 21;  static  conception,  21; 
dynamic  conception,  21 ;  equi- 
librium theory,  35. 

Expectations,  Shakespeare,  igo ; 
Bacon,  190;  Ward,  190;  Young, 
190. 

Fashion,  31 ;  and  machinery-made 

goods,  43. 
Foreign   trade,   unstable,    24,    27 ; 

and  crises  in  England  in    1857. 


248 


INDEX 


31 ;  and  crisis  cycles,  45 ;  Schmol- 
ler  considers,  a  cause  of  crises, 
46;  temporary  relief  from  over- 
production, 76. 

Future,  underestimation  of,  159, 
160. 

"  Futures,"  dealings  in,  171. 

Gambling,  165,  166;  psychology  of, 

196,  197. 
Guyot,  psychology  of  crises,  181. 

Hadley,  on  sun-spot  theory,  151. 
Herschel,   sun-spots    and   climate, 

148. 
Hertzka,  theory,  89. 
Hobson,  effect  of  machinery,  42. 
Honesty  and  credit,  161. 

Individual  business  units,  50. 

Individualistic  production,  49. 

Industrial  revolution,  changes 
caused  by,  42. 

Insurance,  extension  of,  55 ; 
Wachtel's  proposal,  55;  to  raise 
the  standard  of  life,  98-101 ; 
Condorcet,  loi. 

Insolvency,  see  Bankruptcy. 

Interest,  decline  of  rate  of,  58  ;  ex- 
planation of,  by  Adam  Smith,  58; 
Ricardo  on,  59-60 ;  J.  S.  Mill  on, 
61 ;  decline  of,  and  speculation, 
62;  and  crises,  testimony  of  his- 
tory, 64 ;  meaning  of  average  rate 
of,  161. 

Inventions  of  Watt,  Crompton, 
and  ArkwTight,  and  crises,  83 ; 
general  discussion,  25 ;  increas- 
ing disturbance  caused  by,  26. 

Jevons,  list  of  capses  of  crises,  14 ; 
theory  of  periodicity,  139-151. 

Joint  stock  companies,  see  Cor- 
porations. 

Juglar,  definition  of  crisis,  4 ;  re- 
duction of  bank  reserves,  105. 

Juristic  person,  120. 


King,  Gregory,  tables,  141, 

Labor  organizations  and  the  stand- 
ard of  life,  97. 

Laveleye,  settlement  of  balance  of 
trade  causes  crises,  29. 

Law  of  markets,  17. 

Legal  tender  notes,  retirement  of, 
107. 

Legislation,  urged  after  every  crisis, 
103 ;  crises  with  diverse,  104 ; 
monetary,  104-107 ;  difficulty  of 
enacting  proper,  129 ;  enactment 
of  new,  163. 

Literature,  of  little  value,  15 ; 
French,  17;  English,  17;  Ger- 
man, 18 ;  fairly  inclusive,  220. 

Luxurious  expenditure,  and  over- 
production, 75 ;  Chalmers,  Sis- 
mondi,  and  Owen  approved,  90. 

Machine-made  goods  sold  to  wage 
earners,  85,  86. 

Machinery,  demands  uniformity, 
31,  51;  effect  of,  42;  and  over- 
production, 76. 

Managerial  ability,  50 ;  and  rate  of 
interest,  65;  and  use  of  capital, 
66 ;  lack  of,  shown  by  gluts,  69 ; 
modem  need  of,  70,  77 ;  remu- 
neration of,  78  ;  Smart,  78  ;  and 
salaries,  79. 

Market,  expansion  of,  43,  44. 

Memory,  the  selective,  187,  188. 

Mercantile  agencies,  165. 

Middlemen,  elimination  of,  53. 

Mill,  J.  S.,  crises,  where  treated  in 
his  work,  13 ;  theory  of  tendency 
of  profits  to  a  minimum,  61 ; 
emphasizes  credit,  156. 

Mills,  education  as  a  remedy,  214; 
psychology  of  crises,  180,  181. 

Mississippi  Scheme,  196. 

Money,  study  of,  in  connection 
with  financial  history,  105 ; 
American  system  produces  strin- 
gency during  a  crisis,  106 ;    ideal 


249 


INDEX 


system,  io6 ;  "  Currency  School  " 
theory  of  depreciated  paper,  117. 
Monopolies,  29,  51 ;  cornering  the 
market,  29 ;  growth  and  modi- 
fication of,  52;  close  establish- 
ments, 72. 

Neuwirth,  desire  for  wealth,  206. 

Oechelhiiuser,  the  panic,  208. 
Organization,      ability      for,      see 

Managerial  Ability. 
Over-capitalization,  46. 
Over-investment,   theory    of    Rod- 

bertus,  85-89. 
Over-production,  67,  68. 
Overstone,  power  of  the  Bank  of 

England,  113. 

Paper  currency,  unstable  equilib- 
rium of  trade,  24 ;  temporary 
issue  of,  to  ease  a  stringency,  36. 

Peel,  theory  of  note  issue,  117,  ir8  ; 
Bank  Act  of  1844,  17;  act  must 
be  suspended  during  a  crisis, 
106;  effect  of  act,  118,  119;  when 
act  was  violated,  119. 

Periodicity,  school  of  writers  de- 
nying, 22;  of  decline  of  profits, 
64 ;  Diihring,  35 ;  climatic  periods, 
147;  of  harvests  not  shown  for 
recent  years,  149;  of  maximum 
sun-spots,  143;  effect  of  sun- 
spots  on  harvests,  143 ;  growth  of 
credit,  138;  succession  of  genera- 
tions, 139;  general  law  of,  132; 
of  economic  affairs  due  to  sea- 
sons, 133;  of  reforms,  133;  move- 
ment of  settlement,  133. 

Petty,  first  mention  of  periodicity, 

135- 

Plunkett,  T.  F.,  description  of 
crises,  3. 

Precious  metals,  course  of,  29  ;  pro- 
duction of  gold  in  California,  30. 

Private  property,  Rodbertus  would 
retain,   91 ;    an  evolution  to  ex- 


tinguish ownership  in  capital,  91 ; 

and  the  control  of  industry,  48; 

relation  of  ownership  to  control, 

52. 
Production,  law  of,  divergent  from 

that  of  consumption,  31. 
Profit,  falling,  and  production  on  a 

large  scale,  88. 
Public  opinion,  concentrated  on  a 

single  bank  of  issue,  iii;    and 

honor  debts,  176. 
Punctuality,  160. 
Psychology,  of  crises,  180 ;  of  crisis 

theories,    182,    183;    individual 

psychology,      185-197;      social 

psychology,  198-207 ;  psychology 

of   the    crisis    proper,    207-211; 

Oechelhauser,  208. 

Quarter-day,  influence  on  trade, 
140,  141. 

Reform,  periodicity  of,  133. 

Remedies,  paper  currency,  36; 
failure  of  paper  currency  in  the 
United  States  in  1873,  36;  edu- 
cation, 212,  215;  widening  range 
of  social  interests,  215,  216. 

Revivals  of  religion  and  crises,  209, 
210. 

Rodbertus,  his  theory  of  distribu- 
tion, 82,  84;  ideal  plan  for  state 
control  of  industry,  92;  criticism, 
95,  96;  Cohn's  criticism,  94; 
ignores  speculation,  157. 

Roscher,  definition  of  crisis,  4; 
stable  equilibrium,  22;  his  con- 
tribution, 34;  causes,  35;  denies 
periodicity,  136. 

Salaries,  and  organizing  ability,  79. 
Saving,    73,    74;     private    maxim 

and  economic  principle,  77,  78 ; 

Chalmers  on,  78. 
Schiiffle,  growth  of  credit,  157,  158. 
Scudder,    Jr.,    denies    periodicity, 

136. 


250 


INDEX 


Self-interest,  principle  of,  hinders 
organization,  49. 

Smart,  managerial  ability,  78. 

Smith,  Adam,  explanation  of  de- 
cline of  profits,  58  ;  money  econ- 
omized by  using  credit,  156; 
speculative  returns  in  wages,  165. 

Socialism,  and  German  literature 
of  crisis,  18 ;  mistake  of  (Smart), 
78. 

Solidarity,  of  industry,  7 ;  evmced 
by  world  crisis,  10 ;  increased  by 
credit,  24,  153;  and  credit,  34; 
of  economic  problems,  223. 

Speculation,  165-178;  and  decline 
of  profits,  62;  Rodbertus  con- 
siders unimportant,  87 ;  Adam 
Smith,  165;  function  of,  167, 
169 ;  lessens  chance,  168  ;  "  fu- 
tures," 171 ;  margins,  171 ;  in 
government  securities,  174;  tax- 
ation of,  174,  175. 

Standard  of  life,  and  socialism,  96; 
reforms  through  its  elevation,  97  ; 
and  labor  organizations,  97 ;  and 
insurance,  98-101. 

Statistics,  37 ;  Engel's  laws  of  con- 
sumption, 38-39 ;  educate  the 
public  to,  54. 

Stein,  Lorenz  von,  effect  of  credit, 

155- 
Stock  exchange,  exercising  control, 
53;    control  of  speculation,  172, 

173- 

Strikes,  against  unsanitary  condi- 
tions, 159. 

Sully,  transfer  of  feeling,  211. 

Sumner,  overemphasis  of  banks  in 
connection  with  crises,  116. 

Sun-spots,  see  Periodicity,  and  Jev- 
ons ;  years  of  maximum  of,  150. 

Sympathy,  203-205. 

Tariflfs,  28. 

Taussig,  periodic  movement  of  set- 
tlement, 133. 
Testimony,  belief  in,  199-203. 


Theories,  of  crises,  two  classes  of, 

22. 
Tropics,  development  of,  27. 

United  States,  dominance  of  eco- 
nomic interests  in,  215. 
Universal  glut,  67. 

Value,  Rodbertus'  labor  theory  of, 

82. 
Von  Thiinen,  wage  formula,  94. 

Wages,  a  decreasing  factor  in  dis- 
tribution a  cause  of  crises,  83-89 ; 
"  iron  law  "  of,  84 ;  Rodbertus' 
labor-time  checks,  92 ;  the  Von 
Thiinen  formula,  94. 

Wagner,  definition  of  crises,  4; 
overemphasis  of  a  single  cause, 
16 ;  restriction  of  specie  pay- 
ments, 114;  emphasizes  credit, 
156. 

Walker,  F.  A.,  treatment  of  crises, 
13 ;  functions  of  a  bank,  107. 

W^ants,  development  of  new,  79. 

War,  influence  on  industry,  32,  33  ; 
and  crisis  of  1815  in  England, 
33- 

Ward,  optimism  of  expectation, 
190,  191. 

Wasserrab,  place  of  crises  in  po- 
litical economy,  12. 

Waste,  misinvestment  of  capital 
relieves  plethora  of  the  capital 
market,  89;  of  capital  in  attempts 
to  avoid  decline  of  profits,  62. 

White,  definition  of  crises,  4;  Teu- 
tonic nations  subject  to  crises,  9 ; 
psychology  of  crises,  181. 

Widney,  ideal  monetary  system, 
106. 

Wirth,  symptoms  of  a  crisis,  2 ;  list 
of  causes  of  crises,  23. 

Witchcraft  craze  in  Salem,  193, 194. 

World  crisis,  10. 


Young,  optimistic  expectation,  190. 


251 


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"  Of  its  extreme  interest,  its  suggestiveness,  its  helpfulness  to  a  reader  to 
whom  social  questions  are  important,  but  who  has  not  time  or  inclination  for 
special  study,  we  can  bear  sincere  and  grateful  testimony." — JVew  York  Times. 

"  Professor  Giddings  impresses  the  reader  equally  by  his  independence  of 
judgment  and  by  his  thorough  mastery  of  every  subject  that  comes  into  his 
view  "^ —  The  Churchman. 


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